Trade Talk Rally Short Lived
Nick Mastrandrea of Market Tea Leaves - InsideFutures.com - Thu Dec 06, 3:37AM CST

Trade Talk Rally Short Lived

Good Morning Traders,

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

US Dollar: Dec. USD is Up at 97.095.

Energies: Jan '19 Crude is Down at 52.50.

Financials: The Mar 30 year bond is Up 8 ticks and trading at 142.13.

Indices: The Dec S&P 500 emini ES contract is 116 ticks Lower and trading at 2672.25.

Gold: The Dec Gold contract is trading Down at 1241.80. Gold is 8 ticks Lower than its close.

Initial Conclusion

This is not a correlated market. The dollar is Up+ and Crude is Down- which is normal and 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 Down- 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 all of Asia is trading Lower with many exchanges trading into negative triple digit territory. At the current time all of Europe is trading Lower as well.

Possible Challenges To Traders Today

  • Challenger Job Cuts y/y is out at 7:30 AM EST. This is major.
  • ADP Non-Farm Employment Change is out at 8:15 AM. Major.
  • Revised Nonfarm Productivity is out at 8:30 AM. This is not major.
  • Revised Unit Labor Costs is out at 8:30 AM. This is not major.
  • Trade Balance is out at 8:30 AM EST. This is major.
  • Unemployment Claims are out at 8:30 AM EST. This is major.
  • Final Services PMI is out at 9:45 AM EST. This is major.
  • ISM Non-Manufacturing PMI is out at 10 AM. This is major.
  • Factory Orders m/m are out at 10 AM EST. This is major.
  • Crude Oil Inventories is out at 11 AM EST. This is major.
  • FOMC Member Bostic Speaks at 12:15 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.

On Tuesday the ZB made it's move at around 8 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 8 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 8 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 30 minute chart to display better. This represented a Long opportunity on the 30 year bond, as a trader you could have netted about 30 plus 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 - 12/4/18

YM-Dec, 2018 - 12/4/18

Bias

Last Tuesday we gave the markets a Neutral bias as we didn't see any correlation between the indices and the USD. The Dow dropped 799 points and the other indices lost ground as well. Today we aren't dealing with a correlated market and our bias is to the Downside.

Could this change? Of Course. Remember anything can happen in a volatile market.

Commentary

It appears as though the trade talks that began over the weekend in Buenos Aires may have been a one day wonder as the Dow dropped about 800 points on Tuesday with the other indices losing ground as well. Today we have about 13 economic reports, 11 of which will be reported during market hours. The reason for this is because the NYSE and the Nasdaq were closed yesterday for former President Bush's funeral; so in essence the reports that would have been released on Wednesday have now been diverted to Thursday.

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 to the Downside. 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 Lower. This is not normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. On Tuesday January Crude dropped to a low of $52.67. It would appear at the present time that crude has support at $52.00 a barrel and resistance at $55.00. 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 January. Last month OPEC met once again to cut production but the price of crude is starting to climb. Whereas prior to the production cuts the ceiling was in the 50 dollar range and is now back in that area. The question is if whether this is temporary or something more permanent.

If trading crude today consider doing so after 11 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. 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.