What caused the selloff yesterday?

USD: Sept '24 is Up at 102.950.

Energies: Sept '24 Crude is Up at 73.53.

Financials: The Sept '24 30 Year T-Bond is Down 26 ticks and trading at 124.17.

Indices: The Sept '24 S&P 500 emini ES contract is 200 ticks Higher and trading at 5267.50.

Gold: The Dec'24 Gold contract is trading Up at 2452.90.  

Initial conclusion

This is not a correlated market.  The USD is Up and Crude is Up which is not normal, but the 30 Year T-Bond is trading Down. 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 Higher and Crude is trading Higher which is not correlated. Gold is trading Higher which is not 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. Currently Asia is trading Mixed.  All of Europe is trading Mixed as well. 

Possible challenges to traders

• Trade Balance is out at 8:30 AM EST. This is Major.

• RCM/TIPP Economic Optimism. This is Major.

Traders, please note that we've changed the Bond instrument from the 10 year (ZN) to the 2 year (ZT). They work exactly the same.  

We've elected to switch gears a bit and show correlation between the 10-year Treasury notes (ZN) and the S&P futures contract. The YM contract is the Dow Jones Industrial Average, 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 ZT migrated Higher at around 8 AM EST.  If you look at the charts below the ZT gave a signal at around 8 AM with no real economic news is sight and started its Upward climb.  Look at the charts below and you'll see a pattern for both assets. The Dow moved Lower at 8 AM and the ZT moved Higher at around the same time. These charts represent the newest version of BarCharts, and I've changed the timeframe to a 15-minute chart to display better.  This represented a Long opportunity on the 2-year note, as a trader you could have netted about 40 plus ticks per contract on this trade. Each tick is worth $7.625.  Please note: the front month for ZT is Sept and the Dow is now Sept '24.  I've changed the format to filled Candlesticks (not hollow) such that it may be more apparent and visible.  

Charts courtesy of barcharts

ZT -Sept 2024 - 08/05/24

Dow - Sept 2024 - 08/05/24

Bias

Yesterday we gave the markets a Downside bias and the markets didn't disappoint.  The Dow dropped over 1,000 points and we haven't seen that in years. The S&P and Nasdaq both lost ground as well.  Today we aren't dealing with a correlated market but feel the indices are due for a rebound hence our bias is to the Upside.

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

Commentary

Well, we didn't have much in the way of groundbreaking economic news yesterday, so it begs us to ask the question: what caused the selloff yesterday? There are a number of potential reasons as to why that happened. First there have been impending rumors regarding a market meltdown and subsequent recession. Given that we don't a recession going on right now, we will nip that in the bud.  Another reason is Iran has threatened revenge on Israel due to Israel's assassination of an Iranian leader.  The United States is trying to remedy the situation as both Biden and Harris were talking to diplomats as early as this morning. I'm banking on the Iran situation as geopolitics played a hand here.  We haven't seen the markets fall off this dramatically since 2018. The question is will we see more of the same? As in all things, only time will tell.