Powell Does the Trick

Powell Does the Trick

Good Morning Traders,

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

US Dollar: Sept USD is Down at 96.510.

Energies: Aug '19 Crude is Up at 60.76.

Financials: The Sept 30 year bond is Up 7 ticks and trading at 154.28.

Indices: The Sept S&P 500 emini ES contract is 20 ticks Higher and trading at 3003.00.

Gold: The Aug Gold contract is trading Up at 1425.70. Gold is 130 ticks Higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is Down-- and Crude is Up+ which is 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 Higher and Crude is trading Higher which is not correlated. Gold is trading Higher which is correlated with the US dollar trading Up. 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.

Currently all of Asia is trading Higher at this time. All of Europe is trading Higher as well.

Possible Challenges To Traders Today

  • CPI is out at 8:30 AM EST. This is major.
  • Core CPI is out at 8:30 AM EST. This is major.
  • Unemployment Claims are out at 8:30 AM EST. This is major.
  • Fed Chair Powell testifies at 10 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. This is major.
  • FOMC Member Quarles Speaks at 1:30 PM EST. This is major.
  • Federal Budget Balance is out at 2 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 a major move at around 9 AM EST. 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 9 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 9 AM and the YM was moving Lower 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 Long opportunity on the 30 year bond, as a trader you could have netted about a dozen plus ticks per contract on this trade. Each tick is worth $31.25. Please note: the front month for both the ZB and YM contract is now September, 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 - September, 2019 - 7/10/19
YM Sept 2019- 7/10/19

Bias

Yesterday our bias was Neutral as both the USD and Bonds were trading Higher and the S&P was trading Higher as well. Given the fact that the Fed Chair was testifying we felt that it would be prudent to suggest a neutral bias. The Dow gained 77 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

It appears as though the Fed Chair testifying before a congressional committee was exactly what the markets needed to calm itself down. The Fed Chair did not give any commitment as to when a rate cut would be exercised or even if one would be given at all but later in the session FOMC Member Bullard did say that he expects a half point rate cut by year end. That would be the equivalent of two 25 basis point cuts. The Dow rose 77 points and the other indices gained ground as well. The Fed Chair continues his testimony today.

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 Higher and the S&P is Higher. This is not normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday Aug crude dropped to a low of $59.11. It would appear at the present time that crude has support at $59.00 a barrel and resistance at $61.00. 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 August. Both Russia and Saudi Arabia have agreed to keep production cuts in place for the next 6 - 9 months. This will artificially increase the price of crude at the pump by keeping supply low.

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

Crude Oil Is Trading Higher

Crude oil is trading Higher and the S&P is Higher. 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 markets 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.