The Rooster Call: US Dollar Dropping on Possible Fed Rate Hike

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Good Morning Traders!
If it’s Tuesday, that must mean “turn around” Tuesday, right? Your clue to this deeply entrenched crowd behavior was yesterday’s late afternoon action lifting equity index futures. Looking at the charts overnight we see follow-through.

ES price hit our support line. We create these lines without the need of any fancy software or “proprietary” formula.  Last night the video suggested 2025 would be hit Tuesday as part of an onward move toward 2032.  We’ve done that overnight.  ES price moves higher likely re-tests a bench mark near 2040 area.

Why the move higher?  Another crowd behavior tendency in equity index futures is a rise the week of equity options expiration. While anything can happen, so far traders are playing by the same playbook we expect.

Monday’s rejection of our 1985 line with such a strong price bar is telling action for traders.  “Big hands” are engineering a return to the mean.  Consequently, at least 90% of all stocks will open higher in USA market open.

Keep that 1985 line on your daily ES chart.  It will come in handy down the road.

German ZEW economic sentiment report rises to a 4-month high in December. I don’t put much stock in this report, but like the Consumer Confidence report in the USA, it’s widely followed. More often than not this report sees the glass half full rather than half empty serving as an aide for bullish forces.

UK deflation wrapped around the economy like an octopus for three months. Today, we hear UK inflation rises 0.1% from last month’s -0.1%.  This report is a non-event, yet is positive in that the scale shifts ever so slightly better for the economy.

The FED starts the two day FOMC meeting with monetary policy statement announced Wednesday at 2PM ET and Yellen press conference at 2:30PM ET.

The FED will notice Sweden’s Riksbank made no move on their -.35% interest rate today.

US dollar is lower even as the majority of economists and traders expect the FED will raise rates. Concern arises the US dollar could drop on a FED announcement.  Most likely, institutions are taking US dollar position profits prepared to sit on the side-lines while the potential first FED interest rate increase in 9 years occurs. Obviously if the FED surprises and does not increase rates, US dollar would fall big time, whilst Euro would likely soar in knee-jerk response.

We have two pre-market reports today which could upset the rise in US equity index futures pre-market rally follow-through. Consumer Price Index reported at 8:30AM ET is today’s important report serving as a reading on inflation. This report can affect bonds.

A minor report is the FED Empire State Manufacturing Survey of business conditions. Econoday.com tells us order data have all been deeply negative, Employment in the region is in its weakest streak since late 2009. Prices for final goods have been in contraction for three consecutive months. Today’s consensus calls for a reading of -7.00.  IF we see a better than expected number…especially a positive number, this news is bullish for the economy, the market, and a FED rate hike.

Crude rose Monday…no surprise considering renegade traders saw the overweight short positions on the Commitment of Trader’s report.  Deep pocket traders are trying to cause a short-cover rally. $37.10 remains resistance point followed by $39.10. Mark these levels on your intra-day chart. Support comes in at 34.83 area. In day trading you are watching crude as you trade the equity index futures.

It is important to note nothing fundamentally has changed with crude oil. Therefore, ride any rally as a day trader, but be extremely careful calling a bottom with a position trade. Danger lurks with such thinking.

The glorious rally last Friday in bonds was met yesterday with aggressive profit-taking. Bonds are lower today. Nothing special going on here in the big picture. Bonds in-play for day trading. We could see 153.28 area tested again if the down move continues.

China has quietly weakened the Yuan taking the currency to a 4 1/2 year low. The concern here for the Chinese is a FED interest rate causing the Yuan to rise with US dollar hurting exports. They are also playing the currency war as an attempt at making exports more price competitive.

Economic Events

FOMC meeting begins
8:30 Consumer Price Index
8:30 Empire State Mfg Survey
8:55 Redbook Chain Store Sales
10:00 NAHB Housing Market Index
4:00 PM Treasury International Capital

 Markets
Equity index futures are higher overnight / pre-market, yet slightly lower off highs. If we see a pull-back you want to have chart bench marks set expecting pull-back levels. Next you want to see if the “buy weakness” trader attitude emerges taking equity index futures into new highs. If I had to guess, that means morning pull-back followed by lunch time lull, followed by typical afternoon move higher. 

The wild card is trader attitude about taking profits in front of the Wednesday FED FOMC policy statement and Yellen press release.

  • All equity indexes we follow are higher except Nikkei 225. Shanghai Composite flat.
  • VIX shows us blow-off top yesterday and lower today.
  • Crude shows reversal price bar Monday with follow-through today.
  • Natural gas lower incrementally.
  • Gold incrementally higher on US dollar incrementally lower.
  • Silver attempts up move, yet met with selling so only incremental green in Silver.
  • Copper falls back into consolidation.
  • We’ll look at meats in 2016. For now, all meats lower.
  • Grains tiny tiny movement.  This tells you the market is too afraid to buy and too afraid to sell.
  • Sugar rising with crude rebound.
  • Coffee incremental green. We discussed the price structure of yesterday’s price bar.
  • Cotton dangerous.
  • Cocoa break out of large proportion likely imminent.
  • Bonds lower as fear of FED rate increase coupled with simple profit taking take shape. Today’s 8:30AM ET economic reports could move bonds.
  • US dollar and Euro likely trade in tight range in front of FOMC statement. Note today’s 8:30AM ET could cause some action.
  • Yen sees red.
  • Pound consolidates.
  • Canadian dollar higher with crude.
  • Aussie dollar shot higher on central bank statement, but sellers came in and Aussie now in the red.

Think About This!
With overnight pre-market ES moves suggesting higher price continuation in USA trading, Perhaps one of the stocks to watch today is DIS. The long awaited Star Wars movie is released this Friday.  If traders feel the market in general will keep rising, selling DIS put spreads or buying calls is an idea for a short term pop. DIS closed at $109.35 yesterday. A jump to $116 would not surprise anyone.

Have a great trading day!

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.