Markets Take a U Turn

Nick Mastrandrea Market Tea Leaves

Good Morning Traders,

As of this writing 6:20 AM EST, here’s what we see:

US Dollar: Sept USD is Up at 97.260.
Energies: Sept '19 Crude is Down at 54.83.
Financials: The Sept 30 year bond is Up 14 ticks and trading at 163.28.
Indices: The Sept S&P 500 emini ES contract is 30 ticks Lower and trading at 2872.75.
Gold: The Dec Gold contract is trading Up at 1544.00 Gold is 268 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 S&P is Lower and Crude is trading Lower which is not correlated. Gold is trading Higher 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.

Currently all of Asia is trading Lower. At this time Europe is trading Lower as well.

Possible Challenges To Traders Today

CPI is out at 8:30 AM EST. This is major.
Core CPI is out at 8:30 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 a major 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 15 minute chart to display better. This represented a Long 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. Please note: the front month for both the ZB and YM contract is now September, 2019 and I've changed the format to Renko bars such that it may be more apparent and visible.

Charts Courtesy of MultiCharts built on an AMP platform.

Bias

Yesterday we gave the markets a Downside bias as the USD, Bonds and Gold were all trading Higher Monday morning and this bodes well for a Downside day. The markets didn't disappoint as the Dow dropped 391 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 morning we saw a virtual repeat of Friday as the USD, Gold and the Bonds were all trading higher yesterday morning and this doesn't bode well for an Upside day, hence the Downside bias. The markets didn't disappoint as the Dow dropped 391 points and the other indices fell as well. This didn't surprise us as we just followed our rules on Market Correlation and gave the Downside bias hours before the markets opened. Today we have CPI and Core CPI which are major as the Fed watches these numbers for any signs of inflation, which is one of their watchdogs so to speak.

Author

Nick Mastrandrea

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