Downslide Continues...
Nick Mastrandrea of Market Tea Leaves - InsideFutures.com - Fri Dec 07, 3:56AM CST

Downslide Continues

Good Morning Traders,

As of this writing 4:30 AM EST, heres what we see:

US Dollar: Dec. USD is Up at 96.805.

Energies: Jan '19 Crude is Down at 51.23.

Financials: The Mar 30 year bond is Down 5 ticks and trading at 143.01.

Indices: The Dec S&P 500 emini ES contract is 42 ticks Lower and trading at 2680.25.

Gold: The Dec Gold contract is trading Up at 1245.10. Gold is 15 ticks Higher 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 Lower and Crude is trading Lower which is not correlated. Gold is trading Up+ which is not 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 Mixed with half the exchanges trading Higher and the other half Lower. At the current time all of Europe is trading Higher.

Possible Challenges To Traders Today

  • Average Hourly Earnings is out at 8:30 AM EST. This is major.
  • Non-Farm Employment Changeis out at 8:30 AM. Major.
  • Unemployment Rateis out at 8:30 AM EST. This is major.
  • Prelim UoM Consumer Sentimentis out at 10 AM. This is major.
  • Prelim UoM Inflation Expectationsis out at 8:30 AM EST. This is major.
  • Final Wholesale Inventories is out at 8:30 AM EST. This is major.
  • Natural Gas Storageis out at 10:30 AM EST. This is major.
  • FOMC Member Brainard Speaksat 12 PM. This is major.
  • Consumer Credit m/m is out at 3 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 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 - 12/6/18

YM-Dec, 2018 - 12/6/18

Bias

Yesterday we gave the markets a Downside bias as both the USD and the Bonds were trading Higher Thursday morning and this usually reflects a Downside day. The markets didn't disappoint as the Down shed 79 points, the S&P lost 4 but the Nasdaq gained 30. Given that today is Non Farm Payrolls our bias is Neutral.

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

Commentary

After a nearly 800 drop on Tuesday, one might think the markets would be pumped to go higher. No such luck yesterday. All the overseas markets dropped which led to the conclusion that the US markets should drop as well which it did. We knew this at 4 AM EST as we saw the lack of market correlation and gave a Downside bias. The markets didn't disappoint and dropped. Today we have Non Farm Payrolls and our bias is Neutral which means the markets could go in any direction today. Something to be mindful of if trading.

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 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. Yesterday January Crude dropped to a low of $50.08. It would appear at the present time that crude has support at $50.00 a barrel and resistance at $53.00. 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 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 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.