Market Tea Leaves - Hugging the Precipice

Market Tea Leaves

Pre-Market Global Review - 12/28/12 - Hugging the Precipice

The purpose of this newsletter is to hopefully provide the novice trader with some insight as to market direction. The idea is to provide some clues or “tea leaves” as to what the market is doing or is likely to do.

December 28, 2012

Good Morning Traders,
As of this writing 4:40 AM EST, here’s what we see:

US Dollar –Up at 79.940 The US Dollar is up 221 ticks and is trading at 79.940.
Energies – February Oil is up at 91.02.
Financials – The 30 year bond is down 9 ticks and is trading at 148.02.
Indices – The March S&P 500 emini ES contract is up at 1411.50 and is 3 ticks higher.
Gold – The February gold contract is trading down at 1661.40 and is down 23 ticks.

Conclusion
This is not a correlated market. The dollar is up+ and oil is up+ which is not normal and the 30 year bond is trading down which is not correlated. 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 up which does not correlate with the US dollar trading up. However Gold is trading down and the US dollar trading up (which is correlated). So it would appear as though Crude, Bonds and the Indices are the culprits. 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 closed higher. As of this writing all of Europe is trading lower.

Possible challenges to traders today is the following:

- Chicago PMI is out at 9:45 AM EST. This is a major report.
- Pending Home Sales are out at 10 AM EST. This is a major report.
- Natural Gas Storage is out at 10:30 AM EST. Whereas this is not considered a major report, it will move the Natural Gas market.
- Crude Inventories are out at 11 AM EST. Will move the Crude market.

Yesterday we said that Market Correlation called for a lower open. The net result? The Dow closed 19 points lower. It's ironic that when the markets aren't correlated, they tend to go lower. It didn't start out that way though. It was in fact much worse. At it's lowest point yesterday the Dow dropped 150 points and dipped below the 13,000 level (first time in 3 weeks). It didn't exactly help that Senator Reid claimed we are going off the cliff. Just when it looked liked the market was to rebound Senator McConnell claimed that the Democrats "haven't given us anything." This is finger pointing at the umpteen degree. Harry Reid should have tried to sway the 7 Republicans the President needs to avoid a filibuster, instead he choose to declare war on the GOP at which they were forced to defend themselves. Remember no one wants the blame for driving the economy over the fiscal cliff. There was a sign of hope when it was announced that the House would reconvene on Sunday. But that changed after Mitch McConnell spoke. The President has now called a meeting for all 4 Congressional Leaders (Reid, McConnell, the Speaker and Pelosi) scheduled for Friday (today) to see what can be done to avoid the Fiscal Cliff. Which version of legislation is to be passed is not known. Obama wanted to pass a scaled down version that would maintain tax cuts for those Americans making less than $250,000 per year and extend unemployment benefits. But realistically speaking last Thursday evening the Speaker attempted to get a bill passed that would raise taxes on those making $1,000,000 or more and he couldn't do it. Obama wanted to raise the threshold to $400,000 and that wouldn't fly with the GOP. Obama is not going to back down on his pledge to raise taxes on the wealthy as ran his campaign on this issue and he knows that if he backs down, for the next 4 years he'll never get anything done. It's going to be incumbent upon the GOP leaders to convince the radical wing of their party to agree to something. This will be their challenge. It will be interesting to see how this plays out, but until the fiscal cliff is resolved we will have a volatile market. Anytime the market isn't correlated it's giving you a clue that something isn't right and you should proceed with caution.. Today market correlation is calling for a lower open. Could this change? Of course. We could get a stellar Pending Home Sales report or the political meeting may reveal something positive. We'll have to monitor and see. Understand what is meant by a stellar report. If the report meets expectation but doesn't exceed them; then it's not a stellar report. Economic news must exceed expectation to be considered stellar. This is liken to a firm reporting earnings during the height of earnings season. Note: in the future we will be producing videos on Market Correlation and how you can use them in your daily trading. More on this soon.

As I write this the crude markets are trading higher with the US dollar trading higher. This is not normal. Think of it this way. If the stock market is trading lower, it's safe to assume that the crude market will follow suit and vice versa. Crude trades with the expectation that business activity is expanding. The barometer of which is the equities or stock market. If you view both the crude and index futures side by side you will notice this. Crude is trading north of $90 a barrel, as such we should beware of a pullback. Yesterday Crude almost lost the $90 a barrel threshold as it went to 90.05 at its lowest point. We'll have to see if it maintains it. If Crude maintains this level for 3 consecutive trading days, then it would signal a new threshold. Until that time is should be held as suspect because it can easily retreat to below $90 a barrel. Remember that crude is the only commodity that is reflected immediately at the gas pump.

The fiscal cliff remains front and center in terms of market drivers. This will hold until either year end or it is resolved.

Crude oil is trading higher and the US Dollar is advancing. This is not normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 7 AM EST, 9 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. If you feel compelled to trade then consider waiting until after 11 AM EST when the inventory numbers are released and gives us a better sense of direction. I would not be in a trade going into the number as the report will move this market. I would suggest waiting until after the report is released and then judge market direction accordingly. 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 blogs.
Posted by Nick Mastrandrea at 3:45 AM 4 comments:
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