Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day
Good morning, traders! I imagine everything is getting hectic at the North Pole as final preparations are being made for the annual trip around the world. Lots of worry that packages are properly labeled, that reindeer are up to shape, and final gift production.
We have lots of worry in the financial markets too this week with a marked difference. Traders are worried their gift (quantitative easing) will be taken away from them. There are no theoretical models to judge if a “knee-jerk” reaction will take place, or the strength of the knee-jerk. All we know is the market is over-bought in a very strong trend. Any hint of taper causes equity index futures and bonds to drop. Emotions are running high.
It is no wonder Bernanke is leaving. Setting a fuse is easy…dealing with the consequences is a different story. Yellen is thought to continue policy based on the high unemployment rate. Yet, tapering would send a positive signal about the US economy and the FED likes to instill confidence.
The problem with taper is markets look ahead six months. Taper now and the trader mind thinks, “in six months they will taper again.” In the trader mind support for long term bonds and agency mortgage debt would weaken. If the FED cancels part of their demand, who would pick up the slack? Traders assume price will fall.
Eventually bond and mortgage agency debt would drop to a level where people feel better about owning debt with guaranteed return instead of risking funds in the stock market. This is the safety net for a pronounced drop. But the knee-jerk, could still occur.
Forex markets are on edge wondering if the FOMC statement will strengthen or weaken the US dollar. I expect these markets will turn very quiet leading up to FOMC 2 pm ET statement on Wednesday. We also have the Chairman’s press conference at 2:30pm ET.
Last night I wrote we should exit our profitable non-directional trades, and our profitable GLD trade. If you are trying to time your exit, I always monitor the ES. In my mind I am ready to liquidate, but if the ES is lower, I can wait a little longer. For GLD, we watch the February gold contract.
I believe we should remove ourselves between now and Wednesday’s FOMC statement. Why? Because this is an unknown highly emotional event. Play it safe. We banked 150% return on investment with V, but we took hits on CMG and SBUX. The losers had good signals, based on trend and momentum…the market just did not move and this happens. The momentum trader moves to cash quickly compared to a swing trader.
Meanwhile we have nibbled on trades benefiting from any Santa Claus rally that might develop. We nibbled on a hedge with VXX too.
We talked about grains last night and you should have your alarms set. We talked about Euro for day traders and crude. We are watching ES for confirmation. We are monitoring and drinking coffee.
Today’s Reports and FED Activity
- 08:30 AM ET – Consumer Price Index: The government says there is no inflation, but every man and woman on the street sees it every day. As long as the government says there is no inflation, stimulus measures can remain in place or even increase.
- 10:00 AM ET – USA Housing Market Index: A minor report. Rising prices are supposed to make us feel the economy is getting better as demand increases price.
The more important report is Housing Starts on Wednesday.
- Natural Gas fell yesterday and is lower today on an EIA outlook (see below).
- Crude oil is a lumber jack’s dream…flat as a board.
- Brent crude slightly lower.
- Gold and silver are lower in non-eventful trading. Both will move on FOMC statement.
- Soybeans incrementally lower.
- Corn nothing special. The market is dealing with China’s rejection of genetically modified corn.
- Wheat searching for a bottom.
- Cotton finally stalls.
- Coffee potential reversal bar yesterday. We are watching for possible new trend.
- Bonds are quiet in nickel and dime trading marking time.
- US dollar quite.
- Euro quiet.
- Pound falling likely to 1.6200.
- Yen incrementally higher.
- Canadian Dollar incrementally higher, but basically doing nothing.
- Aussie continues dropping on negative economic report.
- USA equity index futures are very quiet after Monday’s surge.
- STOXX 50, DAX, and FTSE 100 are incrementally lower.
Day Trader Bench Marks
Intraday ES Floor Pivots – Using 24 hour electronic market hours 1800-1715 ET.
Main floor pivot: 1773
Intraday Euro Floor Pivot – Using 24 hour electronic market hours 1800-1700 ET.
Main floor pivot: 1.3763
Think About This…
The EIA sharply revised higher estimates of future US crude output to about 9.6 million barrels per day in 2016 in the EIA’s Annual Energy Outlook. Shale production is causing the production increase. EIA predicted continued indefinite growth in natural gas production (Financial Times).
Have a great trading day!
To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.