Futures Commentary and Analysis

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Fed Minutes = Upside Day
Nick Mastrandrea - IF - Thu Oct 12, 3:55AM CDT

Fed Minutes = Upside Day

Good Morning Traders,

As of this writing 4:20 AM EST, heres what we see:

US Dollar: Dec. USD is Down at 92.760.

Energies: Nov Crude is Down at 50.96.

Financials: The Dec 30 year bond is Up 8 ticks and trading at 152.26.

Indices: The Dec S&P 500 emini ES contract is 12 ticks Lower and trading at 2550.00.

Gold: The Dec gold contract is trading Up at 1298.40. Gold is 94 ticks Higher than its close.

Initial Conclusion

This is not a correlated market. The dollar is Down- and Crude is Down- which is not 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 indices are Higher and Crude is trading Down- which is correlated. Gold is trading Up which is correlated with the US dollar trading Down-. 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 dont 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 mainly Higher with the exception of the Shanghai exchange which is trading fractionally Lower. As of this writing all of Europe is trading Lower.

Possible Challenges To Traders Today

  • PPI is out at 8:30 AM EST. This is major.
  • Core PPI is out at 8:30 AM EST. This is major.
  • Unemployment Claims are out at 8:30 AM. This is major.
  • FOMC Member Brainard Speaks at 10:30 AM. This is major.
  • FOMC Member Powell Speaks at 10:30 AM. This is major.
  • Natural Gas Storage is out at 10:30 AM EST. This is major.
  • Crude Oil Inventories is out at 11 AM EST. This is major.
  • 30-y Bond Auction starts at 1 PM EST. This is major.
  • Federal Budget Balance is out at 3 PM EST. This is major.

Treasuries

Weve 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 its liken to a seesaw, when up goes up the other should go down and vice versa.

Yesterday the ZB made its move at around 11:30 AM EST. The ZB hit a High at around that time and the YM hit a Low. If you look at the charts below ZB gave a signal at around 11:30 AM EST and the YM was moving Higher at the same time. Look at the charts below and youll see a pattern for both assets. ZB hit a High at around 11:30 AM and the YM hit a Low. These charts represent the newest version of Trend Following Trades and Ive changed the timeframe to a 30 minute chart to display better. This represented a Shorting opportunity on the 30 year bond, as a trader you could have netted about a dozen ticks per contract on this trade. Each tick is worth $31.25. We added a Donchian Channel to the charts to show the signals more clearly. Please note that the front month for the ZB and the YM contract is now December, 2017.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform Click on an image to enlarge it.

ZB Dec, 2017 10/11/17

YM- Dec, 2017 10/11/17

Bias

Yesterday our bias was Neutral as the USD, Bonds and Gold were all trading Lower but the indices didnt respond to the direction as they all pointed lower yesterday morning. The Dow gained 42 points and the other indices gained ground as well. Today we arent 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

Yesterday the Fed Meeting Minutes came out and guess what? It doesnt appear as though a rate hike is baked in the cake, so to speak as inflation is nowhere in sight and the Fed will have to readjust its criteria for a rate hike. Historically speaking the Fed has always stood by a 3% threshold for inflation in conjunction with a rate hike and that isnt happening. It is quite possible that no rate hike will be forthcoming and that is welcome news for both consumer spending and the Holiday Shopping Season. Today we have about 9 economic reports, most of which are major and proven market movers so well have to see how the markets reacts to this.

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 dont trade equities. While were on this discussion, lets define what is meant by a good earnings report. A company must exceed their prior quarters earnings per share and must provide excellent forward guidance. Any falloff between earning per share or forward guidance will not bode well for the companys shares. This is one of the reasons I dont trade equities but prefer futures. There is no earnings reports with futures and we dont have to be concerned about lawsuits, scandals, malfeasance, etc. Anytime the market isnt correlated its giving you a clue that something isnt 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. Well have to monitor and see.

As I write this the crude markets are Lower and the futures are trading Higher. This is normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday November Crude dropped to a low of $50.61 a barrel. It would appear at the present time that crude has support at $50.28 a barrel and resistance at $52.67. This could change. Well have to monitor and see. 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 November. Last December and after two years OPEC finally decided to cut production but the price of crude is still tame (as of this writing). What they havent figured out yet is that the more countries like Canada and the US produce their own crude (by whatever means) the more crude prices will fall. The move by OPEC to cut production in an attempt to pump up prices is liken to too little, too late as the world doesnt need their oil as much as they used to. Power equipment that used to need oil (Grass Trimmers, Lawn Mowers, Autos) now run on battery power and Canada and the United States are producing more of their own crude. As an update to this the non-OPEC countries have come to an agreement to unilaterally cut production across the board and this has served to temporarily raise crude prices. Well have to see if and how long this lasts

If trading crude today consider doing so after 10:30 AM EST when the inventory numbers come out and the markets gives us better direction.


Crude Oil Is Trading Lower

Crude oil is trading Lower and the markets are Higher. This is 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 todays market is crucial. We as traders are faced with numerous challenges that we didnt have a few short years ago. High Frequency Trading is one of them. Im 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 its 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.


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