Day After Doesn’t Move Dow

Nick Mastrandrea Market Tea Leaves

Good Morning Traders,

As of this writing 4:10 AM EST, here’s what we see:

US Dollar: Sept. USD is Up at 94.505.
Energies: Jul '18 Crude is Down at 66.79.
Financials: The Sept 30 year bond is Up 18 ticks and trading at 143.27.
Indices: The Sept S&P 500 emini ES contract is 46 ticks Lower and trading at 2770.00.
Gold: The Aug gold contract is trading Down at 1303.50. Gold is 50 ticks Lower 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 S&P is Lower and Crude is trading Lower which is not correlated. Gold is trading Down- which is 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 all of Asia is trading Lower with the exception of the Nikkei exchange which is Higher. Currently Europe is trading Mixed at this time.

Possible Challenges To Traders Today

Empire State Mfg Index is out at 8:30 AM EST. This is major.
Capacity Utilization Rate is out at 9:15 AM EST. This is major.
Industrial Production is out at 9:15 AM EST. This is major.
Prelim UoM Consumer Sentiment is out at 10 AM. Major.
Prelim UoM Inflation Expectations is out at 10 AM EST. Major.
TIC Long-Term Purchases is out at 4 PM 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 9:30 AM EST. 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 9:30 AM EST 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 9:30 AM and the YM was moving Lower at the same time. These charts represent the newest version of MultiCharts 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 20 plus ticks per contract on this trade. Each tick is worth $31.25.

Charts Courtesy of MultiCharts built on an AMP platform.

Bias

Yesterday we gave the markets a Downside bias as Crude, The Bonds and Gold were all trading Higher Thursday morning and this usually reflects a Downside day. The Dow dropped 26 points but the S&P and Nasdaq both logged gains for the session. Today we aren't dealing with a correlated market however our bias is to the Downside.

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

Commentary

As predicted the Dow dropped based on our rules of Market Correlation. It's never a good idea to hike interest rates when the economy is moving at full steam ahead as that has a way of derailing it over time. The global didn't like the news either as both Asia and Europe initially dropped. Europe recovered based on the news that the ECB was going to ween off stimulus starting year end. Today we have Empire State Manufacturing Index along with preliminary numbers for both Consumer Sentiment and Inflation Expectations. These are major and proven market movers.

Author

Nick Mastrandrea

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