D-Day Doesn't Disappoint

D-Day Doesn’t Disappoint

Good Morning Traders,

As of this writing 6:30 AM EST

USD:  Jun '23 is Down at 103.965.

Energies: Jul '23 Crude is Up at 72.28.

Financials: The Sep '23 30 Year T-Bond is Up 12 ticks and trading at 128.09.

Indices: The Jun '23 S&P 500 emini ES contract is 4 ticks Lower and trading at 4288.75. 

Gold: The Aug'23 Gold contract is trading Down at 1980.60.  Gold is 9 ticks Lower than its close.

Initial Conclusion

This is not a correlated market.  The USD is Down, Crude is Up which is normal, but the 30 Year T-Bond is trading Higher.  The Financials should always correlate with the US dollar such that if the dollar is Higher, then the bonds should follow and vice-versa. The S&P is Lower, and Crude is trading Higher which is correlated. Gold is trading Lower which is not 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 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 the present time Asia is trading Mixed.  Currently Europe is trading Mixed as well.

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Possible Challenges to Traders Today:

• Trade Balance is out at 8:30 AM EST.  This is Major.
• Crude Oil Inventories is out at 10:30 AM EST.  This is Major.
• Consumer Credit m/m is out at 3 PM EST.  This is 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.

Yesterday the ZN migrated Lower at around 9:45 AM EST as the S&P hit a Low at around the same time.  If you look at the charts below the ZN gave a signal at around 9:45 AM and the ZN continued its Downward trend.  Look at the charts below and you'll see a pattern for both assets. S&P hit a Low at around 9:45 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 Short opportunity on the 10-year note, as a trader you could have netted about a dozen ticks per contract on this trade.   Each tick is worth $15.625.  Please note: the front month for the ZN is now Jun '23.  The S&P contract is also Jun' 23.   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 - Jun 2023 - 6/06/23

S&P - Jun 2023 - 6/06/23

Bias

Yesterday we gave the markets a Downside bias as early in the AM the indices were correlated to the Downside, hence the Down bias.  The markets had other ideas as the Dow closed Higher by 10 points and the other indices traded Higher as well.  Today we aren't dealing with a correlated market and our bias is Neutral or Mixed.

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

Commentary

Early Tuesday morning we gave the markets a Downside bias as both the USD and the Bonds were trading Higher.  This usually signifies a Down Day hence the Downside bias.  The markets however migrated to the Upside late Tuesday morning and remained in positive territory for the remainder of the trading session.  Today we have Trade Balance and Crude Oil Inventories, will this be enough to drive the markets Higher?  Only time will tell.

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 Higher, and the S&P is Lower. This is normal.  Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday July crude dropped to a low of $71.52 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 July '23. 

If trading crude today, consider doing so after 10:30 AM EST when the crude inventories are released, and the markets give us better direction.

Crude Oil Is Trading Higher

Crude oil is trading Higher, and the S&P is Lower. 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 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.