Greenspan Speaks, Markets Dip

Good Morning Traders,

As of this writing 6:15 AM EST, here’s what we see:

US Dollar: Up at 81.015, the US Dollar is up 53 ticks and is trading at 81.015.
Energies: September Crude is up at 102.11.
Financials: The Sept 30 year bond is up 5 ticks and trading at 138.01.
Indices: The Sept S&P 500 emini ES contract is down 11 ticks and trading at 1978.00.
Gold: The August gold contract is trading up at 1294.30 and is up 36 ticks from its close.

Initial Conclusion

This is not correlated market. The dollar is up+ and oil is up+ which is not 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 down and the US dollar is trading up which is 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.

Asia traded mainly to the upside with the exception of the Indian Sensex and Singapore exchanges which traded lower. As of this writing Europe is trading mainly lower with the exception of the London exchange which is fractionally higher.

Possible Challenges To Traders Today

1. Core Durable Goods is out at 8:30 AM EST. This is major.

2. Durable Goods Orders are out at 8:30 AM EST. This is major.

Currencies

Yesterday the Swiss Franc made it’s move at 9:40 AM EST before New Home sales numbers came out. The USD hit a high at around that time and the Swiss Franc hit a low. If you look at the charts below the USD gave a signal at 9:40 AM EST, while the Swiss Franc also gave a signal at just about the same time. Look at the charts below and you’ll see a pattern for both assets. The USD hit a high at 9:40 AM EST and the Swiss Franc hit a low. I’ve changed the charts to reflect a 5 minute time frame and added a Darvas Box to make it more clear. This represented a long opportunity on the Swiss Franc, as a trader you could have netted 12-15 ticks on this trade. Remember each tick on the Swiss Franc is equal to $12.50 versus $10.00 that we usually see for currencies.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Yesterday we said our bias was to the upside as Europe was trading higher and the Financials (both the USD and Bonds) were correlated to the upside. The Dow and Nasdaq dropped fractionally but the S&P advanced by 1 point. Today we aren’t dealing with a correlated market however our bias is to the downside.

Yesterday we said our bias was to the upside as both the USD and the Bonds were correlated to the upside. The markets opened higher until 10 AM when New Home Sales was released. That report came in at 406,000 versus 485,000 expected. The markets then proceeded to drop and flip flopped between positive and negative territory. All in all it wasn’t as bad as it could have been. The Dow dropped 3 points and the Nasdaq dropped 2. The S&P gained 1 point. You have to wonder why in the middle of summer which is traditionally selling season in the home industry did the numbers come in so low. I have a theory that I’ll share with you. Home Builders seem to have this idea that the economy is doing great and that the so-called “recovery” is in full bloom. As such their prices are completely insane and quite frankly unaffordable. This plus the looming specter of interest rate hikes are keeping many potential home buyers from buying. I live in the Garden State and I’ve seen this firsthand. A major builder who a year ago was charging $450,000 for a new home is charging $675,000 for the same home in the same development. No change, no additional options. Who’s buying these homes? Well they aren’t Americans, they’re foreigners whose respective economies are doing far better than the US. Interesting to say the least.

On another note, Mr. Greenspan decide to come out the woodwork yesterday and conducted an interview with Marketwatch. Basically what he said was it would be hard for the Fed to unravel the low interest rate bubble. Really? So when you were the Fed chief and decided to raise interest rates in 1999-2000 with no inflation to speak of and an economy that was running on 8 cylinders, what were you thinking of? You were looking at an outdated model called the Phillips Curve and decided that the economy was overheating and you wanted to slow it down. When you did that you cut off capital to new firms that wanted to expand their infrastructure but couldn’t because you cut off capital to them. Guess what? Many of those firms went out of business except of course Amazon and eBay. You encouraged deregulating banks and guess what? You helped to create the financial bubble that burst in 2008. Do us a favor, stay retired and don’t give interviews.