Dead Cat Bounce

Dead Cat Bounce

Good Morning Traders,

As of this writing 5:05 AM EST, heres what we see:

US Dollar: June USD is Down at 97.245.

Energies: June '19 Crude is Down at 61.15.

Financials: The Jun 30 year bond is Up 15 ticks and trading at 149.21.

Indices: The June S&P 500 emini ES contract is 2 ticks Lower and trading at 2838.75.

Gold: The June Gold contract is trading Up at 1299.50. Gold is 32 ticks Higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is Down- and Crude is Down- which is not normal but the 30 year Bond is trading Higher. 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 Lower and Crude is trading Lower which is not correlated. Gold is trading Higher 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.

All of Asia is trading Higher with the exception of the Singapore exchange which is fractionally lower. Conversely all of Europe is trading Lower with the exception of the London exchange which is fractionally Higher.

Possible Challenges To Traders Today

  • Retail Sales is out at 8:30 AM EST. This is major.
  • Core Retail Sales is out at 8:30 AM EST. This is major.
  • Empire State Manufacturing Index is out at 8:30 AM EST. This is major.
  • Capacity Utilization Rate is out at 9:15 AM EST. This is major.
  • Industrial Production m/m is out at 9:15 AM. This is major.
  • FOMC Member Quarles Speaks at 9:30 AM. This is major.
  • Business Inventories m/m is out at 10 AM EST. Major.
  • NAHB Housing Market Index is out at 10 AM EST. This is Major.
  • Mortgage Delinquencies. This is Major.
  • Crude Oil Inventories is out at 10:30 AM EST. This is Major.
  • TIC Long-Term Purchases is out at 4 PM. This is not 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 9 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 9 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 9 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 15 minute chart to display better. This represented a Shorting opportunity on the 30 year bond, as a trader you could have netted about 12 ticks per contract on this trade. Each tick is worth $31.25. Please note: the front month for the ZB contract is now June, 2019 and I've changed the format to Renko bars such that it may be more apparent and visible.

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

ZB - June, 2019 - 5/14/19
YM - June 2019- 5/14/19

Bias

Yesterday we gave the markets an Upside bias as the USD, Gold and the Bonds were all trading Lower yesterday morning and tis bodes well for an Upside day. The markets didn't disappoint as the Dow rose 207 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

Yesterday morning when we viewed the markets we felt that this was a good situation for a dead cat bounce and in fact we mentioned it in our video (only available to subscribers). What's a dead cat bounce? It's the situation whereby the market has fallen (usually for more than one day) with traders shorting the market hoping to capitalize on the downside. Eventually and inevitably the short must be covered by a buy back. When enough of these happens it changes market direction to the upside. The big question now is will that trend continue? Only time will tell...

On Thursday, April 5th (of last year) 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 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 June crude dropped to a low of $61.31 It would appear at the present time that crude has support at $61.00 a barrel and resistance at $64.00. 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 June. 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 10:30 AM EST when the inventory numbers are released and the markets give us better direction.

Crude Oil Is Trading Lower

Crude oil is trading Lower and the S&P is Lower. This is not 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. To fully capitalize on this newsletter it is important that the reader understand how the various market correlate. More on this in subsequent editions