Chicago PMI Doesn't Wow

Good Morning Traders,

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

US Dollar: Down at 95.225 the US Dollar is down 63 ticks and trading at 95.225.

Energies: October Crude is down at 47.27.

Financials: The Sept 30 year bond is down 2 ticks and trading at 156.02.
Indices: The Sept S&P 500 emini ES contract is down 167 ticks and trading at 1927.50.

Gold: The October gold contract is trading up at 1142.40. Gold is 104 ticks higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is down- and oil is down- which is not normal and the 30 year bond is trading lower. 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 up which is 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.

All of Asia traded lower. As of this writing all of Europe is trading lower.

Possible Challenges To Traders Today

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

- ISM Manufacturing PMI is out at 10 AM EST. This is major.

- Construction Spending m/m is out at 10 AM EST. This is major.

- IBD/TIPP Economic Optimism is out at 10 AM EST. This is not major.

- ISM Manufacturing Prices is out at 10 AM EST. This is not major.

- Total Vehicle Sales – All Day, this is major.

Currencies

Yesterday the Swiss Franc made it’s move around 9:15 AM EST before 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 9:15 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 9:15 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 NinjaTrader platform

Bias

Yesterday we said our bias was neutral as the markets didn’t react in the way they should have yesterday morning. The Dow dropped 115 points and the other indices dropped 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 we said our bias was neutral as the markets didn’t react the way they should have yesterday morning. So how should they have acted? The USD, Crude and Gold were all pointed lower. In theory (and per our rules of Market Correlation) the indices should have been pointed higher. They were not. Instead they were pointed lower which means no follow thru and that means the markets have no sense of direction and could go anywhere; hence a neutral bias. Chicago PMI didn’t wow anyone as it came in at 54.4 versus 54.7 expected. You’ll hear analysts and pundits blame China for the woes of the markets and there is some measure of truth to that however as traders we live in the real world and need to be able to determine market direction for that day.