Good Morning Traders,
As of this writing 6:15 AM EST, here’s what we see:
US Dollar: Mar '23 USD is Up at 101.830.
Energies: Feb '23 Crude is Down at 79.95.
Financials: The Mar '23 30 Year T-Bond is Up 19 ticks and trading at 131.14.
Indices: The Mar '23 S&P 500 emini ES contract is 119 ticks Lower and trading at 4003.00.
Gold: The Feb'23 Gold contract is trading Down at 1925.60. Gold is 98 ticks Lower than its close.
This is not a correlated market. The dollar is Up, and Crude is Down which is normal, and the 30 Year T-Bond is trading Higher. The Financials should always correlate with the US dollar such that if the dollar is lower, then the bonds should follow and vice-versa. The S&P is Lower, and Crude is trading Lower which is not correlated. Gold is trading Lower 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 except the Indian Sensex exchange which is Lower. Europe however is trading Lower at the present time.
Possible Challenges to Traders Today:
- Crude Oil Inventories is out at 10:30 AM EST. This is Major.
- Lack of Major Economic news.
Traders, please note that we've changed the Bond instrument from the 30 year (ZB) to the 10 year (ZN). They work exactly the same.
We've elected to switch gears a bit and show correlation between the 10-year bond (ZN) and the S&P futures contract. The S&P contract is the Standard and Poor's, and the purpose is to show reverse correlation between the two instruments. Remember it's likened to a seesaw, when up goes up the other should go down and vice versa.
Yesterday the ZN hit a Low at around 10 AM EST. The S&P was trading Lower at around the same time. If you look at the charts below ZN gave a signal at around 10 AM and the S&P gave a signal at around the same time. Look at the charts below and you'll see a pattern for both assets. ZN hit a Low at around 10 AM and migrated Higher. 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 10-year note, as a trader you could have netted about 30 ticks per contract on this trade. Each tick is worth $15.625. Please note: the front month for the ZN is now Mar '23. The S&P contract is now Mar' 23 as well. I've changed the format to filled Candlesticks (not hollow) 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.
|ZN - Mar 2023 - 1/24/23|
|S&P - Mar 2023 - 1/24/23|
Yesterday we gave the markets a Downside bias as the Bonds, Gold and Crude were all trading Higher and this usually represents a Down day. The markets closed Mixed with only the Dow showing any gain. 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.
Yesterday we gave the markets a Downside bias as almost all instruments that we use for market correlation purpose was pointed Higher and that usually reflects a Down Day. Initially the markets traded Lower, but then in the afternoon the Dow migrated Higher and closed 104 points Higher. Today the markets will be left to its own devices as the only economic report we have is Crude Oil Inventories, out at 10:30 AM EST.
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 are 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 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 Feb crude dropped to a low of $79.66 a barrel. Will it remain below $100 a barrel? Only time will tell. Crude still hasn't returned to a sense of normalcy therefore we can't quote support and resistance numbers. 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 Feb '23.
If trading crude today, consider doing so after 10:30 AM EST when the Crude Oil inventories 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 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, you’ll also receive our daily Market Bias video that is only available to subscribers.
On the date of publication, Nick Mastrandrea did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.