Markets Take a Reprieve

Good Morning Traders,

As of this writing 4 AM EST, here’s what we see:

US Dollar: Dec. USD is Down at 91.640.

Energies: Nov Crude is Up at 50.69.

Financials: The Dec 30 year bond is Up 11 ticks and trading at 154.07.

Indices: The Dec S&P 500 emini ES contract is 16 ticks Lower and trading at 2497.00.

Gold: The Dec gold contract is trading Up at 1300.00.  Gold is 52 ticks Higher than its close.

Initial Conclusion

This is not a correlated market.  The dollar is Down- and Crude is Up+ which is normal but the 30 year Bond is trading Higher.  The Financials should always correlate with the US dollar such that if the dollar is lower then bonds should follow and vice-versa. The indices are Higher and Crude is trading Up+ which is not correlated. Gold is trading Up+ which is correlated with the US dollar trading Down-.   I tend to believe that Gold has an inverse relationship with the US Dollar as when the US Dollar is down, Gold tends to rise in value and vice-versa. Think of it as a seesaw, when one is up the other should be down. I point this out to you to make you aware that when we don’t have a correlated market, it means something is wrong. As traders you need to be aware of this and proceed with your eyes wide open.

At this hour all of Asia is trading Lower with the exception of the Singapore exchange which is fractionally higher at this hour.  As of this writing Europe is trading Lower with the exception of the Paris and Milan exchanges which are trading Higher.

Possible Challenges To Traders Today

• Flash Mfg PMI is out at 9:45 AM.  This is major.

• Flash Services PMI is out at 9:45 AM.  This is major.

Treasuries

We’ve elected to switch gears a bit and show correlation between the 30 year bond (ZB) and The YM futures contract.  The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments.  Remember it’s liken to a seesaw, when up goes up the other should go down and vice versa.

Yesterday the ZB made it’s move at around 10 AM EST prior to the economic news.  The ZB hit a High at around that time and the YM hit a Low.  If you look at the charts below ZB gave a signal at around 10 AM EST and the YM was moving Higher at the same time. Look at the charts below and you’ll see a pattern for both assets. ZB hit a High at around 10 AM and the YM hit a Low.  These charts represent the newest version of Trend Following Trades and I’ve changed the timeframe to a 30 minute chart to display better.  This represented a shorting opportunity on the 30 year bond, as a trader you could have netted about 20 plus ticks per contract on this trade.  Each tick is worth $31.25.  We added a Donchian Channel to the charts to show the signals more clearly.  Please note that the front month for the ZB and the YM contract is now December, 2017.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

 

Bias

Yesterday we called for a Neutral bias as the indices didn’t show any sense of normalcy hence the neutral bias.  The Dow dropped 53 points and the other indices lost ground as well.  Today we aren’t dealing with a correlated market, our is to the downside.

Could this change? Of Course.  Remember anything can happen in a volatile market. 

Commentary

So yesterday the markets finally decided to take a reprieve and drop across the board.  Of course the pundits have been saying this for awhile but they make it seem like financial Armageddon as opposed to a simple rest or drop.  Perhaps its the fear of the Fed unwinding their holdings that has everyone spooked.  From our point of view it’s just another day in the markets and yesterday that market happen to close lower…