Dow Rebounds, Finally

As of this writing 5:05 AM EST, here’s what we see:

US Dollar –Up at 82.935, the Sept US Dollar is up 135 ticks and is trading at 82.935.
Energies – August Oil is down at 95.06.
Financials – The September 30 year bond is up 10 ticks and is trading at 134.15.
Indices – The September S&P 500 emini ES contract is up at 1586.50 and is up 20 ticks.
Gold – The August gold contract is trading down at 1232.30 and is down 433 ticks from its close.

Initial Conclusion: This is not a correlated market. The dollar is up and oil is down which is normal and 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 up and the US dollar is trading higher 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.

Asia closed mixed with about half the exchanges closing higher and the other closing lower. As of this writing all of Europe is trading higher.

Possible challenges to traders today is the following
1. Final GDP q/q is out at 8:30 AM EST. This is major.
2. Final GDP Price Index q/q is out at 8:30 AM EST. This is major.
3. Crude Oil Inventories are out at 10:30 AM EST. This will move the crude markets.

Yesterday we said our bias was to the upside as the markets were nearly correlated with the exception of the Bonds. The net result? The Dow gained 100 points and the other indices gained ground as well. Today we are not dealing with a correlated market. The Financials are trading higher and the indices are as well which is not correlated. Hence our bias is to the downside today. Could this change? Of Course. Remember anything can happen in a volatile market.

Yesterday we said the markets were poised to go higher as the futures were nearly correlated and it looked as though Asia was regaining some lost ground. Europe followed this and closed higher and the Dow closed higher, finally. This was helped by positive news on the economic front. Durable Goods, Core Durable Goods, New Home Sales all served to bolster the indices. Even Case-Schiller reported a 12% gain in home prices, although I would be a little leery of that. The question is will we have follow thru today? Bear in mind that the Dow is off about 600 points from last Tuesday's close ( before Bernanke's befuddlement). As always we'll have to monitor and see.

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 is 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 trading lower and the US Dollar is advancing. This is normal. Think of it this way. If the stock market is trading lower, it's safe to assume that the crude market will follow suit and vice versa. Crude trades with the expectation that business activity is expanding. The barometer of which is the equities or stock market. If you view both the crude and index futures side by side you will notice this. Yesterday August crude dropped to a low of 94.59 a barrel and held. We'll have to monitor and see if crude either goes lower or holds at the present level. It would appear at the present time that crude has support at 93 a barrel and resistance at 97. This could change. All we need do is look at what happened last fall when crude was trading over $100.00 a barrel. We'll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump.

Future Challenges:
- Budget Battle - ongoing.
- Debt Ceiling in the August time frame.
- Asian Contagion - happening now

Crude oil is trading lower and the US Dollar is advancing. This is normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 7 AM EST, 9 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. If you feel compelled to trade consider doing so after 10:30 AM when the economic reports/crude inventory numbers are released and the markets give us better direction. 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.

Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com Feel free to visit and subscribe.