Recession Fears Drive Markets Lower

Nick Mastrandrea - Market Tea Leaves - Mon Sep 26, 2022

Good Morning Traders,

As of this writing 6:20 AM EST, here’s what we see:

US Dollar: Dec '22 USD is Up at 113.545.

Energies: Nov '22 Crude is Down at 78.35.

Financials: The Dec '22 30 Year bond is Down 26 ticks and trading at 127.31.

Indices: The Dec '22 S&P 500 emini ES contract is 136 ticks Lower and trading at 3675.00.

Gold: The Dec'22 Gold contract is trading Down at 1648.40. Gold is 72 ticks Lower 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 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 Lower. All of Europe is trading Lower as well with the exception of the Milan exchange which is trading Higher at the present time.

Possible Challenges to Traders Today:

FOMC Member Collins Speaks at 10 AM EST. This is Major.
FOMC Member Mester Speaks at 4 PM EST. Not Major.

Treasuries

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.

Last Friday the ZN made its move at around 11:30 AM EST. The ZN hit a Low at around that time and the S&P moved Lower at around the same time. If you look at the charts below ZN gave a signal at around 11:30 AM and the S&P moved Lower 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 11:30 AM and the S&P was moving Lower shortly thereafter. 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 20 ticks per contract on this trade. Each tick is worth $15.625. Please note: the front month for the ZN is now Dec '22. The S&P contract is also Dec' 22. 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.

Bias

Last Friday we gave the indices a Neutral bias as we saw little evidence of Market Correlation, hence the Neutral or Mixed Bias. The markets veered to the Downside as the Dow closed 486 points Lower and the other indices traded Lower 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

Well, we've been saying it for a while and last Friday the fear came out: traders are now concerned with the prospect of a recession. So much so that the Dow closed nearly 500 points Lower, and the other indices traded Lower as well. I hate to sound like a broken record but the harder the Fed pushes to raise rates, sooner or later they will demand and when that happens, layoffs occur, and we all know what follows. If the Fed wanted to engineer a soft landing; cut raise but so at a more reasonable pace. Instead of 3 quarter of a point, do one quarter point increments. They are anxious to stop or kill inflation but doing so they will impact the economy. Ben Bernanke said it best: what killed the economy in 1929 and caused the Great Depression was the utter lack of capital at a time when the economy needed it. I just hope we don't overlook the mistakes of the past.

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 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 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 Friday Nov crude dropped to a low of $78.04 and has drifted below the proverbial $100 a barrel mark. 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 Nov '22.

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. 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.