This is not a correlated market. The USD is Down and 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 Higher and Crude is trading Higher which is not correlated. Gold is trading Higher which is 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. Asia traded mainly Lower with the exception of the Hang Seng exchange. Europe is trading Higher with the exception of the German Dax exchange.

Possible Challenges to Traders

S&P/CS Composite-20 HPI y/y is out at 9 AM EST. This is Major.

HPI m/m is out at 9 AM EST. 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 2-year Treasury notes (ZT) 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 Lower at around 9:20 AM EST with no news in sight. The Dow climbed Higher at the same time. Look at the charts below and you'll see a pattern for both assets. The Dow moved Higher at 9:20 AM EST and the ZT moved Lower at around the same time. These charts represent the newest version of Bar Charts, and I've changed the timeframe to a 15-minute chart to display better. This represented a Short opportunity on the 2-year note, as a trader you could have netted about 10 plus ticks per contract on this trade. Each tick is worth $7.625. Please note: the front month for ZT is now Mar '25 and the Dow is now Mar '25. I've changed the format to filled Candlesticks (not hollow) such that it may be more apparent and visible.

Charts Courtesy of BarCharts Click on an image to enlarge

ZT -Mar 2025 - 12/30/24

Dow - Mar 2025- 12/30/24

Bias

Yesterday we gave the markets a Downside bias and the markets didn't disappoint. The Dow closed Lower by 418 points, and the other indices closed Lower 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

Yesterday we suggested a Down Day and the markets didn't disappoint. We saw no evidence of Upward movement yesterday hence the Downside bias. Today is an abbreviated day with the New Year holiday; the bond market will close at 2 PM EST but the stock market itself will close at normal time. Personally, I think traders will be heading for the exit doors early as if someone didn't reach their earning goal by today, one more day won't make a difference. Personally, I wish you all a very Happy New Year and trust that we will have continued success in 2025. We will be back on Thursday, January 2nd

Just so you understand, Market Correlation is Market Direction. It attempts to determine the market direction for that day, and it does so by using a unique set of tools.

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 Neutral or Mixed. 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 Higher. This is not normal. Crude and the markets are now reverse correlated such that when the markets are rising, crude drops and vice-versa. Yesterday Feb crude dropped to a low of $ 69.44 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 Feb '25.

If trading crude today, consider doing so after 10 AM when the markets give us better direction.

Crude Oil Is Trading Higher

Crude oil is trading Higher, and the S&P is Higher. This is not 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.

Author

Nick Mastrandrea

Market Tea Leaves

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.