Rally Takes a Breather

US Dollar: Dec. USD is Down at 93.300.

Energies: Jan ’18 Crude is Down at 57.43.

Financials: The Mar 30 year bond is Up 9 ticks and trading at 154.00.

Indices: The Dec S&P 500 emini ES contract is 16 ticks Lower and trading at 2624.25.

Gold: The Feb Gold contract is trading Up at 1270.00.  Gold is 51 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 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 Lower 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.

At this hour all of Asia is trading Lower.   As of this writing all of Europe is trading Lower as well.

Possible Challenges To Traders Today

• ADP Non-Farm Employment Change is out at 8:15 AM EST.  This is major.

• Revised Nonfarm Productivity is out at 8:15 AM.  This is not major.

• Revised Unit Labor Costs is out at 8:15 AM.  This is not major

• IBD/TIPP Economic Optimism.  This is major.

• Crude Oil Inventories is out at 10:30 AM EST.  This is major.

Treasuries

We’ve elected to switch gears a bit and show correlation between the 30 year bond (ZB) and The YM futures contract.  The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments.  Remember it’s liken to a seesaw, when up goes up the other should go down and vice versa.

Yesterday the ZB made it’s move at around 10:30 AM EST.   The ZB hit a Low at around that time and the YM hit a High.  If you look at the charts below ZB gave a signal at around 11 AM EST and the YM was moving Lower at the same time. Look at the charts below and you’ll see a pattern for both assets. ZB hit a low at around 10:30 AM and the YM hit a High.  These charts represent the newest version of Trend Following Trades and I’ve changed the timeframe to a 30 minute chart to display better.  This represented a long opportunity on the 30 year bond, as a trader you could have netted about 20 plus ticks per contract on this trade.  Each tick is worth $31.25.  We added a Donchian Channel to the charts to show the signals more clearly.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform.

 

Bias

Yesterday we gave the markets a Neutral bias as the markets didn’t seem to have any sense of direction yesterday morning.  The Dow rose, then dropped, then rose again and finally fell into negative territory where it finished the day down 109 points and the other indices lost ground 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

When we first looked at the markets yesterday morning there didn’t seem to be any correlation whatsoever hence the neutral bias.  The economic news reported yesterday didn’t help matters as it was pretty much all negative.  Trade Balance and ISM numbers were all down.  Today we have ADP Non Farm Employment Change which will give us a good indication for Friday’s Non Farm Payroll Report.