The Return of Window Dressing??

Nick Mastrandrea Market Tea Leaves

Good Morning Traders,

As of this writing 3:50 AM EST, here's what we see:

US Dollar: Sept. USD is down at 95.775.
Energies: July Crude is down at 49.28.
Financials: The Sept 30 year bond is down 42 ticks and trading at 171.22.
Indices: The Sept S&P 500 emini ES contract is down 11 ticks and trading at 2064.00.
Gold: The August gold contract is trading down at 1317.90. Gold is 90 ticks lower 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 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 lower 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.

All of Asia traded higher with the exception of the Shanghai exchange which traded fractionally lower. As of this writing all of Europe is trading to the downside.

Possible Challenges To Traders Today

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

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

– Natural Gas Storage is out at 10:30 AM EST. This is major.

– FOMC Member Bullard Speaks at 1:30 PM EST. This is major.

Gold

We've elected to switch gears a bit and show correlation between Gold 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 Gold made it's move at around 9:30 AM EST after the 8:30 economic news was reported. Gold hit a high at around that time and the YM hit a low. If you look at the charts below the YM gave a signal at around 9:30 AM EST and Gold was moving lower at the same time. Look at the charts below and you'll see a pattern for both assets. The YM hit a low at around 9:30 AM EST and Gold hit a high. These charts represent the latest version of Trend Following Trades and I've changed the timeframe to a 15 minute chart to display better. This represented a shorting opportunity on Gold, as a trader you could have netted about 40 plus ticks per contract on this trade. Each tick is worth $10. 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 our bias was neutral as the USD, Gold and the Bonds were all trading higher yesterday which would have been indicative of a downside day however didn't happen so our bias was neutral. A neutral means the markets could go in any direction. The Dow closed up by 285 points and the other indices gained ground as well. Today we aren't dealing with a correlated market and our bias is neutral.

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

Commentary

Well it looks as though the markets decided to charge higher yesterday as all the indices leapt higher. This would make sense as the Dow lost nearly 900 points between last Friday and Monday, so there's still about 400 points to go to bring the markets up to parity prior to Brexit. Given that today is the last trading day for June and hence the calendar quarter, it begs us to ask the question: will the markets undergo window dressing? Window Dressing was used by the Smart Money to prop up shares such that various hedge and mutual funds would gain ground for the quarter. It hasn't really happened in awhile but given that Brexit was recent and drove the markets lower, anything could happen....

Author

Nick Mastrandrea

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