The Bulls Stampede

US Dollar: Sept. USD is Down at 93.330.

Energies: Sept Crude is Down at 47.60.

Financials: The Sept 30 year bond is Down 1 tick and trading at 155.18.

Indices: The Sept S&P 500 emini ES contract is 14 ticks Lower and trading at 2449.25.

Gold: The Dec gold contract is trading Up at 1291.40.  Gold is 4 ticks Higher than its close.

Initial Conclusion

This is not a correlated market.  The dollar is Down- and Crude is Down- which is not normal and the 30 year Bond is trading Lower.  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 Down- and Crude is trading Down- 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 Asia is trading mainly Higher with the exception of the Aussie and Shanghai exchanges which are trading Lower.  As of this hour all of Europe is trading Higher with the exception of the Spanish IBEX exchange which is trading Lower.

Possible Challenges To Traders Today

–  FOMC Member Kaplan Speaks at 9:05 AM EST.  This is major.

–  Flash Manufacturing PMI is out at 9:45 AM EST.  This is major.

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

• New 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 9 AM EST at around the time Home Price Index numbers came out. 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 9 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 9 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 called for an upside bias and the markets didn’t disappoint.  The Dow rose 196 points and the other indices gained ground as well.  Today we aren’t dealing with a correlated market and our bias is neutral.

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

Commentary

All we did yesterday was to follow our rules on Market Correlation which told us early in the AM that the markets was poised to rise and it did. Yesterday morning both the Bonds and Gold were trading lower and this usually coincides with an upside day which is what we experienced. Today we have abit more news on the economic front and a major market mover for today will be New Home Sales which is out at 10 AM EST.