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Feb 25, 2022

Dow futures shed 800 points, while NASDAQ, Oil & Gold fall slightly

By:Ryan Sullivan

Thursday marked a three-hundred and thirty-five-day low in the E-Mini Dow Jones Futures (/YM), down 12.67% from its 36,832-point high on January 5th, 2022. The E-Mini Dow Futures contract saw an 885-point free fall on Thursday followed by a 1,038-point rally that held above 32,975 for the remainder of the session. Friday’s morning session continues to show strength.

The strong movement we have experienced in Dow Futures over the last twelve weeks has been matched by the NASDAQ E-Mini Futures (/NQ), Light Crude Oil Futures (/CL), and Gold Futures (/GC).

Fig. 1: Three-month percent change.

How does NASDAQ and Dow futures compare?

Dialing in, we see the NASDAQ E-Mini Futures (/NQ) have moved lower in a similarly aggressive manner, compared to E-Mini Dow Futures, over the same period. However, the NASDAQ E-Mini Futures made its presence known sooner than the Dow Futures, putting in its current high of 16,767.50 on November 22nd, 2021, then falling 22.23% to 13,025.75 during Thursday’s session.

Thursday's low in the NASDAQ Futures marks a new low for its last 288 days (about 9 and a half months) of trading. The velocity of the NASDAQ Futures price movement over the last 12 weeks, compared to Dow Futures, allows us to infer that the components of NASDAQ Futures contract react sooner and more aggressively than the components of the Dow Futures contract. This can be understood when looking at the components of both the Dow and NASDAQ Futures and seeing that the components of the NASDAQ Futures contract are fewer in number and more volatile in general.

Gold and crude oil futures hit multi-year highs

Light Crude Oil Futures (/CL) recorded a 2,741 day (about 7 and a half years) high of $100.54 during Thursday’s session. After breaking the $100 mark during Thursday’s session, it quickly sold off to the low 90’s. Thursday’s session high was 31.73% off the all-time Light Crude Oil Futures high of $147.27 in July of 2008. The last three weeks of price action in Light Crude Oil Futures has moved into a significant range between $88.45 and $111.82, which was established in late 2007.

Gold Futures Remain on the Upside 

Gold Futures (/GC) has experienced a less intense but still significant rally over the same last three-month period of trading when compared to Light Crude Oil Futures. Gold Futures marked its high more recently than Light Crude Oil Futures, on August 7th, 2020. Thursday’s Gold Futures session closed the day at $1926.30, 7.8% off its high in 2020.

The price of Light Crude Oil Futures and Gold Futures behaves differently to macro stimuli than indices that are comprised of U.S. equities do because, Gold and Oil have an uncorrelated use case that is valuable in separate ways compared to equities. Simply put, Oil and Gold are commodities while the Dow and NASDAQ Futures are comprised of equity components.

The last 24 months of price action in the Dow, NASDAQ, Gold, and Light Crude Oil Futures appear to have correlations that remain consistent over time. It is important in volatile market situations, such as the market conditions we have experienced in the last 24 months, to maintain perspective on these products and understand that these correlations do not have to hold true, and often do not, when subjected to outlier market stressors.

Fig. 2: Three-month correlations

What Does the Near Future Have in Store for These Futures Products and Their Correlations?

The matrix above shows a strong positive correlation between Dow and NASDAQ Futures and a low to slightly negative correlation between the Dow/NASDAQ and Oil/Gold Futures. This tells us that the Dow and NASDAQ Futures have positively moved together over the last three months, while Oil and Gold are unlikely to move in a significantly correlated way to Dow and NASDAQ Futures movements.

What’s the outlook for oil and gold futures?

It is entirely possible that Light Crude Oil Futures continues its rise and breaks through the significant $100 mark with strength and does not stop. It could blow through that important price range of $88 to $111 and establish a price range that is higher, with upward resistance that has yet to be fully discovered. The same may ring true for Gold Futures, which has the potential to set all-time highs in the near future.

If that does happen for Gold and Oil, we must be willing to accept that Dow and NASDAQ Futures do not have to capitulate. It is possible that Dow and NASDAQ Futures could take on a more negatively correlated relationship to Gold and Oil Futures, as Gold and Oil react to global news and supply chain concerns.

Open an account now with tastyworks to trade Dow, NASDAQ Oil and Gold futures

Do not let any market or personal bias affect sound assumptions that can be made on trading instruments, such as the current correlations that exist between Dow, NASDAQ, Oil and Gold Futures. If correlations exist that lead to assumed directional assumptions, do not let that assumption keep sound reasoning from allowing a trade to be placed that conflicts with those correlations.

If a product moves in one direction and a historical correlation says another product should or should not react in a certain way, become comfortable letting go of that assumption.

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