The Bulls Retreat

Good Morning Traders,

As of this writing 3:45 AM EST, here's what we see:

US Dollar: Jun. USD is Up at 97.420.
Energies: July Crude is Down at 43.19.
Financials: The Sept 30 year bond is Up 3 ticks and trading at 156.16.
Indices: The June S&P 500 emini ES contract is 29 ticks Lower and trading at 2430.25.
Gold: The Aug gold contract is trading Up at 1246.60. Gold is 31 ticks Higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is Up+ and crude is Down- which is normal and 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 Up and Crude is trading Down- which is correlated. Gold is trading Up+ which is not correlated with the US dollar trading Up+. 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 Asia is trading Lower with the exception of the Shanghai exchange which is Higher. All of Europe is trading Lower at this hour.

Possible Challenges To Traders Today

– Existing Home Sales is out at 10 AM EST. This is major.

– Crude Oil Inventories is out at 10:30 AM EST. 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 with no real economic news in sight. The ZB hit a low at around that time and the YM hit a high. If you look at the charts below ZB gave a signal at around 10 AM and the YM was moving lower at the same time. Look at the charts below and you'll see a pattern for both assets. ZB hit a low at around 10 AM and the YM hit a high. 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 long opportunity on the 30 year bond, as a trader you could have netted about 15 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 contract is now September, 2017.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Bias

Yesterday we gave the markets a neutral bias as the indices didn't have a firm sense of direction yesterday morning. The Dow dropped 62 points and the other indices lost ground as well. Today we aren't dealing with a correlated market and our bias is to the downside.

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

Commentary

Yesterday we gave the markets a neutral bias as once again the markets didn't give any sense of direction yesterday morning; in fact the indices were pointed higher early Tuesday AM but we didn't buy into it as the Bonds and Gold were trading higher. It would seem that the "merger" rally has worn off and the markets are settling back down. Typically this may be construed as a "dead cat bounce" but suffice it to say that what goes up will most certainly go down and vice-versa. Today there isn't much eco news to speak of as we have Existing Home Sales and Crude Oil Inventories....