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2018-07-16 Week - Market Overview (ES, ZN, and Commodities)

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This Week

Fed testimony is the only potential market driver this week. More likely, Trade War news will be the catalyst for any market moves. Market fluctuations will remain, without clear direction apparent until after the moves. Volumes should be lower for summer doldrums, but that remains to be seen.

Market Overview

What is going on in markets?

I really don`t know.

This is the time of year where trading houses and proprietary trading firms get in their new applicants. That is because slow and relatively stable markets mean that traders are less likely to lose big. However, this year seems to lack that stability. Most firms are cutting back on their trading desks, and probably are not training many humans to do what they`ve spent billions to get HFTs to trade.

This time of year, volumes fall off as people take their vacations. Normally, it is a chance to make small scalps at relatively stable markets. That means looking at the median price and being able to get a fill above or below where price will slowly creep back to the median price. It would normally take an hour or more for the price action to creep along enough to get a good fill. Then an OCO with a tight stop would fill over the course of a few hours. Perturbations in price would normally be small.

Summertime slowly creeping markets were a good place to scalp to a better position. That means taking a tick on either side of a position to improve that position. However, in these more volatile markets with light volumes, trying to scalp would be fatal. That is because price has made wide swings in a marching fashion (not spikes, but solid directional moves in both directions).


In the S&P (ES), the summer price action would creep around 2 points (8 ticks), through EU trade. USA open would often be just enough volume and volatility to exit a position or increase size if markets were moving against a position. These slow markets were a safe place to make slow tedious trades. Tedious markets are what you want as an investor because grinding tedious markets are safe.

Now, we can see 10 and 20 point moves over the trading day which must freak out investors. These look like directional moves, but without catalysts that seem logical. The Trump Trade War seems to move markets higher one day then lower the next. Big bank shares have taken a hit while FANGs seem to be boosted. So it appears that money wants to gamble, they just don`t know where to put their bets. Markets filled with gamblers are NOT stable long term. Once the money starts to exit, the wave of selling will follow.


In bonds, summer trading would be lucky to see a 4 tick move across the trading day. Even EU leaders giving speeches would fail to move more than 3 ticks from the median in pre-markets. US data could often get a rise out of action, but directional moves were rare.

Now, we are seeing big bond moves even in the EU trade (USA pre-market). Every new tidbit about Trump`s Trade War seems to give FX markets a scare which translates into bonds. Bond spreads should normally be quite stable because sovereign debt is where long term stable investors hunt yield. However, FX volatility makes international spreads a risk (AU-USA, BUND-NOTE, etc.) seem to be affecting bond market more than underlying sovereign risk.

So much paper is floating around in the bond markets, after 10 years of money printing central banks, that this sort of volatility should frighten all markets. This is especially true considering that China is sitting on a mountain of USA debt, held in bonds, which they could dump into market and collapse price. This would shoot yields to the stars, and likely collapse ALL debt markets (high yield, housing, munies, etc). This would have the effect of collapsing ALL market. This is NOT the kind of market stable investment wants to see for the summer doldrums.


I remember Bloomberg reporting on a trading day many years ago with the description, "Anything you could drop on your foot was sold off." I thought that was an excellent description of the commodities sector because these are real world goods with physical locations and cost of movement (shipping costs).

Commodities require handling and storage, with real world input costs of production (oil, heavy machinery, fertilizers, etc.). Volatility in price is expected until the goods required are transported to the market in demand. Buyers and sellers require these raw materials to manufacture the food, goods and services that other companies supply. Input cost of production is often very high, so oil price can play a major role in underlying price action, long term. Migration to market is also critical for commodities, but a Trade War kills that.

In a Trade War, commodities are often slammed the most. Raw materials are easiest to tax because they are most visible. They require massive infrastructure and their movement is very visible (like oil tankers or coal barges). It is unlike that they will be smuggled across borders to avoid taxes so commodities are a safe place to tax for governments. How many pockets full of corn would it take to pay off a plane ticket to China?

Summer time trade in commodities is usually the most exciting market because of seasonal fluctuations. Oil price drives energy intensive exploits (like mining) and summer often sees high fuel prices, if only for higher levels of human movement. Grain crops are also normally subject to summer weather conditions where every drought and heavy rain gives movements to price action. Diesel price also play a role in farm production as fuel is often one of the biggest costs of production. However, this year the Trade War seems to be the biggest driver in market moves.

Trump is planning to release some of the USA strategic oil reserve, which may eventually give relief to higher fuel prices. However, that will likely be too late to help the summer gas price. It also must be weighed in against Iran sanctions that take effect later in the year, which will again push crude oil prices higher. So fuel prices should (and thus input costs for production of commodities) should remain relatively stable or slightly higher.

In a volatile market, commodities should be bid higher. Countries of the world store value using gold and many are moving away from sovereign debt and currency. In an economic collapse, barter becomes the norm over use of currency (Venezuela is currently on the barter system). Oil, food, precious metals become most valuable when instability takes hold, and volatile markets often give rise to commodity prices for that reason.

Anything you can drop on your foot will be high in demand when markets fail, so it amazes me when they are sold off in uncertain times.


YOU ARE AN ADULT and must make your own decisions. ONLY YOU know what level of experience you possess. ONLY YOU know what level of risk you are willing to take. ONLY YOU know what your financial goals are, and to what lengths you are prepared to go to meet those goals. You will be the one to wear your losses, so trade with caution and do your own research.

Henry Ledyard is an independent trader. He has NO affiliations with banks, brokerages, funds, trading houses or markets. He trades for himself and posts trading ideas merely to share information. He does NOT want your money, advice or opinions. He does NOT want your unsolicited emails. If you require further financial advice, seek it elsewhere. Henry`s opinions should be considered as addled as his blog site:

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About the author

Henry Ledyard is a futures and options trader with over 20 years of trading experience and over 10 years of experience in trading futures. Henry Ledyard holds multiple degrees: BE Electrical Engineering, BS Physics, and BA Visual Arts. He has worked as a prop-trader (AU bonds, USA bonds) but found the bond market not conducive to his trading style. He currently trades for himself, and has no associations with any brokerage or firms. He has no boss and seeks no money for his information and trade ideas.

Henry’s trading focus is primarily on futures with longer term trades (hours to days) in tangibles (commodities and equities) with a real world bias. This is because high frequency trading algorithms are in control of much of the arbitrage trades and short term volatility.

Henry is predominantly a chart reader who looks for direction changes to enter and exit markets and is not a trend follower or scalper (much). His trade ideas are based on broader market forces creating opportunity while focusing on over-sold or over-bought moves. To make money in markets, he has to combine timing, direction and risk which can be a challenge (and may not suit your trading style). He is not an FX trader, nor stock trader (mostly) and tries to avoid bond markets except as a spread for other trades. He also avoids ETFs and many derivative products because of exaggerated leveraged moves.

Henry is based in Sydney, Australia and normally trades EU pre-market through the USA session with the occasional eye to Asia trade for indicators of direction.

The trade ideas expressed by Henry are places he sees potential for profit and may be as addlepated as his blog site:

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