Today's Client Letter - Rooster Call

Rooster Call - March 28, 2018

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

Good Morning Traders!

Yesterday we saw a normal "turn around" Tuesday in equity index futures and many other instruments. Of course we expected a pull-back off lows and this occurred by the professionals starting 3:50PM ET.

The idea of professionals stepping in so as to push equity index futures higher is part of the simplified method they trade. Humans are humans. I think the professionals realize if they can push the market higher off lows...especially after a large price drop, then evening traders (morning for Asian traders) will read into this action "what do they know? why are they taking the market higher?" The overnight traders add to the buying with simple protective stops below the low of Tuesday.

USA based traders with offices overseas likely continue the momentum because everyone knows this is part of a bankable trading strategy. Not 100%, mind you...but in trading everything is about statistical edge when working with extremely large sums of money.

The Europeans start their day first receiving reports from their offices in Japan and Hong Kong. Essentially reading in price action the game's afoot, the Europeans have no reason to upset the apple cart. Buy orders are issued...unless there is some kind of dramatic political or geopolitical wrench thrown into the works.

I ask you to look at price action today, another "surprise" price reversal. Just make yourself aware. All we do is follow the foot steps of the professionals. It's pre-market - All eyes now turn to the USA trader. Up to USA traders keeping the dream alive. We see this as a normal and repeating action in the markets. Please don't think you can apply logic...apply instead herd mentality with the idea of safety in numbers...professionals following professionals...then trade your trading plan which shows you have a market edge.

I switched to June gold today. Silver and Copper remain May.

This morning I was looking at the VIX. If you want to know why so many traders crashed and burned in 2017, just look at the VIX abnormally low throughout much of 2017. Traders who switched from equity index futures into other instruments likely survived...or traders who worked with equity index futures likely were operating off small profit expectations.

So now we have 1%+ index futures movement as the norm. We have a VIX around 20. Increased volatility = increased day trading range.

Out of habit, I continue taking a close target while letting a runner work for potential greater gains using a trailing stop. Everyone has to feel personally very comfortable with their exits. I think exits are the most challenging aspect of trading...deeply personal based on the individual trader's attachment to money. It is so easy to say, "cut your losses early and let your profits run." It is something else to put this idea into practice in day trading. Use a trailing stop you like working runners mechanically so you are not required to think or use discretion.

I would rather see consistency than the occasional $1k win on a single contract, which is possible, yet extremely rare. Are you willing to sit with the trade? I am not, typically preferring morning trading only, but if a run is working...let 'er rip. How many times do you see a range like we saw yesterday on NQ? Consistency pays the bills and is bankable is my point. Just understand some days, like yesterday are tremendous, while other days barely show price movement and your runner is stopped out every single time. Find YOUR level of comfort.

Overnight - Yesterday's huge USA government debt auction was met with tremendous buying, no doubt helped by falling stocks. A key take-away is no one is concerned the Chinese might retaliate against tariffs by stopping USA debt purchases.

North Korea confirms a summit with South Korea and the USA after consultation with big daddy China. Gold has one less geopolitical concern.

Russia smartly advises the public it may want extension of the current OPEC production schedule. This "talk" of course is all about keeping crude from falling. Saudi Prince also discussed the agreement could be 10 to 20 years rather than a year to year agreement. Crude not impressed so far.

Economists are watching the rising LIBOR rate. You remember the LIBOR rate scandal right? More here). Another market found "fixed" by the too big to fail banks. Well, LIBOR sets the pace for many consumer loans including mortgages and student loans. Importantly, Libor underpins approximately $350 trillion in derivatives.

Currently the LIBOR rate is 2.302%. This is the highest we have seen sense November 2008, says the Wall Street Journal. The negative here is a rising LIBOR has potential of hurting future borrowing. If people, corporations and institutions cannot borrow due to higher rates...they don't buy or will reduce financing business...which can cause an economic expansion slow down. This is a macro concern. I think you should understand if this concern with LIBOR finds a mainstream following, we could see an exodus out of stocks and into bonds...we have a technical level we watch on monthly charts as our early warning indicator.

You know I love the "too big to fail" bank model right? I mean what other business can break the laws affecting so many and few if anyone goes to jail? The lack of penalties actually provides an incentive for breaking the law. It gets better! The tax payer is the lender of last resort...ALWAYS! The mafia is no doubt envious/jealous. If bank CEO's were threatened with jail time and bankruptcy for infractions on their watch, suddenly, the problem would go away.

Interesting fact: In the past 12 months, the Stoxx Europe 600 has delivered a 1% loss in local-currency terms, accounting for both share-price appreciation and dividends, compared with a 14% total return for the S&P 500 (Wall Street Journal). So much for buy and hold.

All the financial press is absorbed in describing the tech sell-off. Considering the lofty valuations, a sell-off is healthy. With so many tech stocks normal investing metrics are thrown out the window and everyone gushes at the prospect of an amazing future. It took Facebook to prick this bubble and the sell-off may not be done. I would watch AAPL as the bell-weather here due to large market capitalization. If you want to watch a few others consider AMZN, GOOGL, and NVDA.

Markets are closed Thursday evening and Friday.

Friday is a USA trading holiday. This means after Thursday's morning action, we expect a very slow trading afternoon with the following Monday also likely slow. Politics, of course, can change the market as a major driver of trading action.

Economic Events - Econoday.com - Nothing major today.

MBA Mortgage Applications 7:00 AM ET

GDP - 3rd Revision 4th Quarter - Revised up 2.9% 8:30 AM ET - US dollar rises on the news.

International Trade in Goods 8:30 AM ET

Corporate Profits 8:30 AM ET

Retail Inventories [Advance] 8:30 AM ET

Wholesale Inventories [Advance] 8:30 AM ET

Pending Home Sales Index 10:00 AM ET

EIA Petroleum Status Report 10:30 AM ET

Raphael Bostic Speaks 11:30 AM ET

2-Yr FRN Note Auction 11:30 AM ET

7-Yr Note Auction 1:00 PM ET

Farm Prices 3:00 PM ET

Our most important economic data point this week is Thursday, the Personal Income and Outlay's report. Also on Thursday is the USDA Prospective Plantings and Grain Stocks. This report can move the market and anything...I mean anything including limit moves in the grains can occur. Just be aware.

Markets I advised as an educational trade, a short in Cotton early last week suggesting selling call options in a spread. Considering tomorrows USDA report, traders will consider taking profit before that report is released at least on a partial as a trading idea. China has imported 26% less cotton this year and analyst predict less acreage for Cotton this year. Anything can happen with the Plantings report...professionals will stand aside on this report or trade the report using options where risk is known and limited.

Equity index futures were all in the green when I started Rooster Call, now some are in the red. Let the first 15 minutes pass. Can markets retest February lows? Why not?

DAX, STOXX 50, and NIKKEI 225 are higher, so my bias is ES likely shall pull higher. Just a bias...not a trading strategy.

Crude tried and failed yesterday for a retest of January highs. Crude report today. This market is dependent upon "talk" more than anything else keeping the dream alive. Separately, Venezuela production problems reported as that country continues imploding.

Gasoline typically well supported into the Easter holiday.

US dollar is stronger today and this hurts metals including platinum, gold and silver. Gold and silver enjoying whack day.

Softs mixed.

No position trading grains in front of Thursday.

Today consider metals, equity index futures, and euro for day trading.

Think About This!

Speaking Today - Each Spring and then again the period just before the Fall trading season, I conduct several webinars. The idea is reach as many traders who might benefit from my discussion where a trade strategy is provided the trader can immediately test on their own. I will hold my next free webinar this week on March 28, at 1PM ET. Click here and register.

Have a great trading day!

Martin Rimes

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