Nick Mastrandrea
Market Tea Leaves
Good Morning Traders,
As of this writing 4:55 AM EST, here’s what we see:
US Dollar: Down at 98.950 the US Dollar is down 205 ticks and trading at 98.950.
Energies: February Crude is down at 29.80.
Financials: The Mar 30 year bond is up 31 ticks and trading at 158.14.
Indices: The Mar S&P 500 emini ES contract is down 100 ticks and trading at 1889.50.
Gold: The Feb gold contract is trading up at 1083.10. Gold is 95 ticks higher than its close.
Initial Conclusion
This is not a correlated market. The dollar is down- and crude is down- 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 Crude is trading lower 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 this writing all of Europe is trading lower.
Possible Challenges To Traders Today
- Retail Sales m/m are out at 8:30 AM EST. This is major.
- Core Retail Sales m/m are out at 8:30 AM EST. This is major.
- PPI is out at 8:30 AM EST. This is major.
- Core PPI is out at 8:30 AM EST. This is major.
- Empire State Manufacturing Index is out at 8:30 AM EST. This is major.
- FOMC Member Dudley Speaks at 9 AM EST. This is major.
- Capacity Utilization Rate is out at 9:15 AM EST. This is not major.
- Industrial Production m/m is out at 9:15 AM EST. This is not major.
- Prelim UoM Consumer Sentiment is out at 10 AM EST. This is major.
- Prelim UoM Inflation Expectations is out at 10 AM EST. This is major.
- Business Inventories m/m is out at 10 AM EST. This is major.
Currencies
Yesterday the Swiss Franc made it’s move at around 10 AM EST with no economic news in sight. 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 10 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 10 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 about 20 plus ticks per contract 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 as the futures didn’t seem to have any sense of direction yesterday morning, meaning the markets could go in any direction. The Dow gained 228 points and the other indices gained ground as well. Today we aren’t dealing with a correlated market and will maintain a neutral bias.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary
Yesterday we gave a neutral bias as the instruments we track didn’t give any sense of direction. For those of you who are new to us a neutral bias means the markets could go in any direction and is something to be mindful of if trading. Typically the best course of action is to wait for all the economic news to be released, judge market reaction accordingly and then decide. Today we have options expiration which is a monthly occurrence and that unto itself lends a layer of complexity to an already complicated market. This is not Quadruple Witching which occurs 4 times a year (March, June, September and December). This is just normal option expiration and usually you see a reaction from the old option to the new at around 11 AM EST; this usually gives the trader about an hour and a half to determine what the best course of action is. Additionally today we have a virtual tsunami of economic reports (11 in all) and that will have a bearing on what occurs today in the markets….
Given that Monday is Martin Luther King Day in the United States, we will return on Tuesday, January 19th.
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.
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Editors’ Picks
AUD/USD remains firm above 0.6600 ahead of RBA
AUD/USD maintains its bullish bias well and sound on Monday, extending the multi-session recovery past the 0.6600 barrier ahead of the key interest rate decision by the RBA.
EUR/USD keeps the constructive tone near 1.0800
EUR/USD started the week in a positive note amidst the Dollar’s inconclusive price action, altogether motivating the pair to attempt a move to the proximity of the 1.0800 region, where the 200-day SMA also converges.
Gold holds on to modest gains around $2,320
Gold trades decisively higher on the day above $2,320 in the American session. Retreating US Treasury bond yields after weaker-than-expected US employment data and escalating geopolitical tensions help XAU/USD stretch higher.
Bitcoin price holds above $63K as MicroStrategy tops BTC ownership list
Bitcoin (BTC) price recorded a rather bold two days this past weekend in a surge that saw millions in positions liquidated. However, the week is off to a calm start with altcoins sucking liquidity from the BTC market.
Stagflation warning: Service economy contracts as prices rise
In another stagflation warning sign, the U.S. service sector contracted in April even as service prices rose. The Institute for Supply Management's non-manufacturing PMI dropped to 49.4 in April, dipping from 51.4 in March.