Correlated Market = Downside Day

Good Morning Traders,

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

US Dollar: Down at 95.975 the US Dollar is down 160 ticks and trading at 95.975.

Energies: October Crude is down at 44.45.

Financials: The Sept 30 year bond is up 19 ticks and trading at 157.10.
Indices: The Sept S&P 500 emini ES contract is down 81 ticks and trading at 1969.50.

Gold: The October gold contract is trading down at 1132.50. Gold is 10 ticks lower than its close.

Initial Conclusion

This is not a correlated market. The dollar is down- and oil is down- which is not normal but 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 Crude is trading down 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 lower with the exception of the Sensex exchange which traded higher. As of this writing all of Europe is trading lower with the exception of teh London exchange which is trading higher..

Possible Challenges To Traders Today

- Chicago PMI is out at 9:45 AM EST. This is major.

- Lack of major economic news.

Currencies

On Friday the Swiss Franc made it’s move around 8:30 AM EST immediately after the economic news was reported. The USD hit a low at around that time and the Swiss Franc hit a high If you look at the charts below the USD gave a signal at around 8:30 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 low at around 8:30 AM EST and the Swiss Franc hit a high. These charts represent the latest version of Trend Following Trades and I’ve changed the timeframe to a Renko chart to display better. This represented a shorting opportunity on the Swiss Franc, as a trader you could have netted 20 plus ticks on this trade. We added a Donchian Channel to the charts to show the signals more clearly. 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 Ninja Trader platform

Bias

On Friday we said our bias was to the downside as the Bonds, Crude and Gold were all trading higher and this doesn’t bode well for an upside day. The Dow dropped 12 points, the Nasdaq rose 15 and the S&P gained 1 point. Today we aren’t dealing with a correlated market and our bias is neutral. Note: Subscribers kindly review the Market Bias video for a detailed explanation.

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

Commentary

On Friday we said the market was poised to drop and it did. All we used was our own rules of Market Correlation. We said that the market was nearly correlated to the downside and those of you who are subscribers saw this in our Market Bias video. The economic news reported wasn’t that stellar on Friday and now we’re hearing that the voting members of the Fed are dog-fighting as to whether or not a rate increase is justified for September. If history is any measure as to what the Fed will do then in all likelihood they’ll wait until either year-end or the beginning of next year, review all data from the previous 12 months and then make a decision. They did the exact same thing 2 years ago when it came to tapering off QE. Our guess is that they’ll probably do the same but again only time will tell.