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State of the Union


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State of the Union

Good Morning Traders,

As of this writing 4 AM EST, heres what we see:

US Dollar: March USD is Up at 95.705.

Energies: March '19 Crude is Down at 54.43.

Financials: The Mar 30 year bond is Down 7 ticks and trading at 145.01.

Indices: The Mar S&P 500 emini ES contract is 2 ticks Higher and trading at 2721.75.

Gold: The Feb Gold contract is trading Down at 1316.20. Gold is 31 ticks Lower than its close.

Initial Conclusion

This is not a correlated market. The dollar is Up+ and Crude is Down- which is normal but 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 S&P is Higher and Crude is trading Lower which is correlated. Gold is trading Lower which is correlated with the US dollar trading Higher. 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 Asia is trading Higher with the exception of the Nikkei and Singapore exchanges which are trading Lower at this time. Currently all of Europe is trading Higher at this time..

Possible Challenges To Traders Today

  • Final Services PMIis out at 9:45 AM EST. This is major.
  • ISM Non-Manufacturing PMI is out at 10 AM EST. This is major.
  • IBD/TIPP Economic Optimism - tentative. 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 a major move at around 8 AM EST. The ZB hit a High at around that time and the YM hit a Low. If you look at the charts below ZB gave a signal at around 8 AM EST and the YM was moving Higher at the same time. Look at the charts below and you'll see a pattern for both assets. ZB hit a High at around 8 AM and the YM was moving Higher at the same time. These charts represent the newest version of MultiCharts and I've changed the timeframe to a 30 minute chart to display better. This represented a Shorting opportunity on the 30 year bond, as a trader you could have netted about 20 ticks per contract on this trade. Each tick is worth $31.25. Please note: the front month for the ZB contract is now March, 2019

Charts Courtesy of MultiCharts built on an AMP platform Click on an image to enlarge it.

ZB - March, 2019 - 2/4/19
YM - March, 2019- 2/4/19

Bias

Yesterday we gave the markets a Neutral bias as the indices didn't seem to have much in the way of correlation and direction yesterday morning. 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

Yesterday the markets didn't seem to have much in the way of trend or direction in the AM. Whereas there wasn't anything in the way of economic news to drive the markets higher, they rose anyway. The Dow gained 175 points and the other indices gained ground as well. Today we suspect that the markets will be on the alert to see if any news will be forthcoming from DC given that the State of the Union address will be delivered later this evening. I have no doubt that the talk will be around the shutdown and the border wall but I wonder if there will be major finger pointing. I suspect yes but only time will tell....

On Thursday, April 5th we had the honor and privilege to be interviewed by David Lincoln on his You Tube channel. David is a floor trader for the options markets. If you listen to this interview, you will enjoy it. To view the interview go to:

ttps://youtu.be/U7gh9oanjIE

Just so you understand, Market Correlation is Market Direction. It attempts to determine the market direction for that day and it does so by using a unique set of tools. In fact TradersLog published an article on this subject that can be viewed at: http://www.traderslog.com/market-correlation-is-market-direction/


As readers are probably aware I don't trade equities. While we're on this discussion, let's define what is meant by a good earnings report. A company must exceed their prior quarter's earnings per share and must provide excellent forward guidance. Any falloff between earning per share or forward guidance will not bode well for the company's shares. This is one of the reasons I don't trade equities but prefer futures. There is no earnings reports with futures and we don't have to be concerned about lawsuits, scandals, malfeasance, etc. Anytime the market isn't correlated it's giving you a clue that something isn't right and you should proceed with caution. Today our bias is Neutral. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see.

As I write this the crude markets are Lower and the S&P is trading fractionally Higher. This is normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday March crude dropped to a low of $53.29. It would appear at the present time that crude has support at $54.00 a barrel and resistance at $56.00. Remember that crude is the only commodity that is reflected immediately at the gas pump. Please note that the front month for crude is now March. Last month OPEC met once again to cut production but the price of crude is starting to climb. The question is if whether this is temporary or something more permanent.

If trading crude today consider doing so after 10 AM EST when the markets give us better direction.

Crude Oil Is Trading Lower

Crude oil is trading Lower and the S&P is fractionally Higher. This is normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 9 AM EST, 11 AM EST and 2 PM EST when the crude market closes. If crude makes major moves around those time frames, then this would suggest normal trending, if not it would suggest that something is not quite right. As always watch and monitor your order flow as anything can happen in this market. This is why monitoring order flow in today's market is crucial. We as traders are faced with numerous challenges that we didn't have a few short years ago. High Frequency Trading is one of them. I'm not an advocate of scalping however in a market as volatile as this scalping is an alternative to trend trading. Remember that without knowledge of order flow we as traders are risking our hard earned capital and the Smart Money will have no issue taking it from us. Regardless of whatever platform you use for trading purposes you need to make sure it's monitoring order flow. Sceeto does an excellent job at this. To fully capitalize on this newsletter it is important that the reader understand how the various market correlate. More on this in subsequent editions.

Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a daily newsletter that is dedicated to your trading success. We teach and discuss market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com. Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, youll also receive our daily Market Bias video that is only available to subscribers.



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About the author


Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com Feel free to visit and subscribe.

Nick has traded various financial instruments in his career but is currently  focused on the Futures markets. At one time Nick held a NASD Series 7 license and currently holds a Life, Health and Variable Authority.  He resides in the Princeton area of New Jersey and can be reached at nmastran@verizon.net or Skype: nmastran

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