Yellen Talk Drives Markets Lower

Good Morning Traders,

As of this writing 5:30 AM EST, here’s what we see:

US Dollar: Up at 100.415 the US Dollar is up 395 ticks and trading at 100.415.
Energies: January Crude is up at 40.50.
Financials: The Dec 30 year bond is down 14 ticks and trading at 157.02.
Indices: The Dec S&P 500 emini ES contract is up 48 ticks and trading at 2093.50.
Gold: The December gold contract is trading down at 1049.00. Gold is 48 ticks lower than its close.

Initial Conclusion

This is a not a correlated market. The dollar is up+ and crude is up+ which is not normal but 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 up and Crude is trading higher which is not correlated. Gold is trading down which is 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 mixed with half the exchanges trading higher and the other half lower.. As of this writing Europe is trading mainly higher.

Possible Challenges To Traders Today

- Challenger Job Cuts are out at 8:10 AM EST. This is major.

- ADP Non-Farm Employment Change is out at 7:30 AM EST. This is major.

- Unemployment Claims are out at 8:30 AM EST. This is major.

- Final Services PMI is out at 9:45 AM EST. This is not major.

- Fed Chair Yellen Testifies at 10 AM EST. This is major.

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

- Factory Orders m/m are out at 10 AM EST. This is major.

- Natural Gas Storage is out at 10:30 AM EST. This could move the Nat Gas market.

- FOMC Member Fischer Speaks at 1:10 PM EST. This is major.

Currencies

Yesterday the Swiss Franc made it’s move at around 8:15 AM EST prior to the 8:30 News coming out. 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 8:15 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 8:15 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 the $10.00 that we usually see for currencies.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Bias

Yesterday we gave the markets a neutral bias which means it could go in any direction and it did! The Dow dropped 158 points and the other indices lost ground as well. Today we aren’t dealing with a correlated market and our bias is to the upside.

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

Commentary

Yesterday for the first time ever Janet Yellen spoke on two separate occasions to two separate groups. Her message seemed to be pretty much on cue as the transcripts of her talk all seem to be saying the same thing: there’s a high probability that the Fed will hike rates at the December meeting which is two weeks away. Now is this neutral posturing by Janet Yellen to throw everyone off? Possibly. It wouldn’t be the first time the Fed’s ever done that. We sense however that she’s quite serious about doing this so our take would be to get all your affairs in order prior to the FOMC meeting as the aftermath may be highly volatile. We’ll get some insight on this today as Yellen will be testifying to the Joint Economic Committee in DC at 10 AM EST, so stay tuned….

Share: Analysis feed

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.