Nick Mastrandrea
Market Tea Leaves
Good Morning Traders,
As of this writing 4:10 AM EST, here’s what we see:
US Dollar: Mar. USD is Down at 101.315.
Energies: February Crude is Up at 53.05.
Financials: The Mar 30 year bond is Up 2 ticks and trading at 152.21.
Indices: The March S&P 500 emini ES contract is 6 ticks Higher and trading at 2265.00.
Gold: The February gold contract is trading Down at 1195.60. Gold is 42 ticks Lower 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 Up+. 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 Up+ which is not correlated. Gold is trading Down which is not 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.
Asia traded mainly higher with the exception of the Shanghai and Sensex exchanges which traded lower. As of this writing all of Europe is trading higher.
Possible Challenges To Traders Today
– Core Retail Sales is out at 8:30 AM. This is major.
– Retail Sales is out at 8:30 AM EST. This is major.
– PPI is out at 8:30 AM EST. This is major.
– Core PPI is out at 8:30 AM EST. This is major.
– FOMC Member Harker Speaks at 9:30 AM EST. This is major.
– Prelim UoM Consumer Sentiment is out at 10 AM. This is major.
– Prelim UoM Inflation Expectations is out at 10 AM. This is major.
– Business Inventories is out at 10 AM EST. This is not 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 11:30 AM EST with no real economic news in sight. 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 11:30 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 11:30 AM EST 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 30 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.
Charts Courtesy of Trend Following Trades built on a NinjaTrader platform.
Bias
Yesterday we gave the markets a downside bias as both the Bonds and Gold were trading higher yesterday morning and this does not bode well for an upside day, hence the downside bias. The Dow dropped 63 points and the other indices lost 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
What a difference a day makes!!! Yesterday we were extolling the virtues of Donald Trump’s press conference and today we talking about the Trump “Dump” as opposed to the Trump “Bump” which is what this rally’s been called. The Dow at one point yesterday was down by over 200 points and it seemed as though traders were quick to dump. From our perspective all we did was to follow our rules of Market Correlation and came up with a downside bias. The markets didn’t disappoint as all the indices traded lower yesterday. Today we have 8 economic reports, most of which are major and we have an upcoming holiday on Monday (MLK) which in all likelihood means light volume with traders heading for the exit doors early. The markets will trade an abbreviated session on Monday with the exchanges closing at 12 noon. Something to be mindful of if trading….
Trading performance displayed herein is hypothetical. The following Commodity Futures Trading Commission (CFTC) disclaimer should be noted.
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance trading results is that they are generally prepared with the benefit of hindsight.
In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results.
There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
Trading in the commodities markets involves substantial risk and YOU CAN LOSE A LOT OF MONEY, and thus is not appropriate for everyone. You should carefully consider your financial condition before trading in these markets, and only risk capital should be used.
In addition, these markets are often liquid, making it difficult to execute orders at desired prices. Also, during periods of extreme volatility, trading in these markets may be halted due to so-called “circuit breakers” put in place by the CME to alleviate such volatility. In the event of a trading halt, it may be difficult or impossible to exit a losing position.
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