Nick Mastrandrea
Market Tea Leaves
Good Morning Traders,
As of this writing 4:10 AM EST, here’s what we see:
US Dollar: Mar. USD is Down at 100.990.
Energies: February Crude is Up at 52.51.
Financials: The Mar 30 year bond is Up 35 ticks and trading at 153.29.
Indices: The March S&P 500 emini ES contract is 35 ticks Lower and trading at 2261.75.
Gold: The February gold contract is trading Up at 1204.30. Gold is 77 ticks Higher than its close.
Initial Conclusion
This is nearly a correlated market. The dollar is Down- and crude is Up+ which is normal but the 30 year bond is trading Up+. 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 Up+ which is 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.
Asia traded mainly lower with the exception of the Aussie and Sensex exchanges which traded higher. As of this writing all of Europe is trading lower.
Possible Challenges To Traders Today
– Unemployment Claims are out at 8:30 AM. This is major.
– FOMC Member Evans Speaks at 8:30 AM EST. This is major.
– FOMC Member Harker Speaks at 8:30 AM EST. This is major.
– Import Prices m/m are out at 8:30 AM EST. This is major.
– Natural Gas Storage is out at 10:30 AM EST. This is major.
– 30-y Bond Auction starts at 1 PM EST
– Federal Budget Balance is out at 2 PM EST. This is not major.
– Fed Chair Yellen Speaks at 7 PM 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 11:30 AM EST with no real economic news in sight. 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 11:30 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 11:30 AM EST 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 30 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 downside bias as the USD, Bonds and Gold were all pointing higher yesterday morning and usually this results in a downside day. The markets however had other ideas as the Dow gained 99 points and the other indices advanced as well. Today we are dealing with a nearly correlated market and it’s correlated to the downside, hence our bias is to the downside.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary
Whereas yesterday morning the markets seemed to be headed lower in the early AM hours; this did not hold up as the session began and everyone was waiting to hear what the President-Elect had to say. It seems as though Mr. Trump can truly move the markets based upon what he says and he’s not even in office yet!!
During the press conference his representative stated how the future president will “build a wall” between himself and his assets. His sons will be running his business and he reiterated that a wall will be built between the US and Mexico. Our take on this is simply this: does anyone truly believe that he will be insulted from his assets? What’s to stop his sons from calling him to ask for advice? It would naive to think that this wouldn’t or couldn’t happen. We’ve stated before that this presidency won’t be loaded with the transparency that we took for granted over the past 8 years. In all likelihood it will be loaded with secrecy.
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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