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Correlation

EUR/CAD - Juicy Little DivergenceWe've got a bit of a strange one here today... EUR/CAD is shaping up for a near textbook bullish divergence pattern AND it's sitting on a long established S/R zone (defined by my S/R algo - see the Related Ideas). Why is that strange? Well, basically because EUR is so weak at the moment. It's just broken multi-year lows, so unless that's a false breakout (which is a possibility, I guess), EUR should head lower. Generally I like to trade a strong/weak pair, and trading weak/weak pairs can result in some indecisive action (see basically all of 2019 for EUR/CAD). Anyway, this is a textbook trade for me, so I'll be taking it - BUT, as always I'll be waiting for confirmation. We've already had a perfect touch (a few days ago) of the S/R zone just below current price, so all that's left is to wait for price confirmation. There's lots of things you can look for here, but in a nutshell you just want to see bullish strength. I'll keep an eye on this one over the coming days and see how it develops. Profit targets are a bit hard to define because EUR/CAD has been stuck in a sideways movement for months. So I'll be going with the next highest S/R zone at 1.53793 (always remember to leave a pretty wide buffer around these zones). That would be a 700+ pip movement, but would/will likely take months to play out. If that works for you, great. If not, potentially look at riding the zig zag upwards. All the best! DD
Long
by DreamsDefined
2
Elliott Wave & Intermarket Analysis For NIKKEI And USDJPYHello traders! Today we will talk about stocks, specifically Nikkei and why USDJPY can see higher prices. Well, as you may already know, in EW theory after a three-wave corrective decline, the trend should remain to the upside. This is what we see in the stock market all the time. However, Nikkei got our attention, because we can see a nice five-wave rally after that three-wave a-b-c correction, which means that Nikkei remains in uptrend, but after another three-wave correction in the lower degree, where ideal support would be here around 21450 - 21250 levels, just keep in mind that bullish confirmed can be only if it manages to turn back above 21770 region! In the right picture you can see tight positive correlation between NIKKEI and USDJPY, which means that if NIKKEI points higher, then even USDJPY can see higher prices, so don't be surprised if USDJPY remains bullish towards 109 area or higher! So, seems like risk-on sentiment may continue and when we are in risk-on, we usually see bullish stocks, which are followed by recovery on XXX/JPY crosses. That being said, be aware of a bullish continuation on stocks, while XXX/JPY cross pairs may see a bigger recovery! Be humble, trade smart and wait for the right sentiment to enter the market! Disclosure: Please be informed that information we provide is NOT a trading recommendation or investment advice. All of our work is for educational purposes only.
CME:NKD1!Education
by ew-forecast
Something's wrong? S&P500 vs XLY:XLP + a history lesson/reviewWelcome! Today we'll have a look at an interesting development in the S&P500, as well as look back at some past history making events. First up, I'm not predicting anything. I'm not in the business of predictions because it's a fools errand. I trade what happens, and until something happens all of this is academic. However, I am in the business of making money, and that means managing risk. When we see something in the markets that makes our little internal alarm bells start ringing, we should factor that into our decision making going forward. Secondly, this isn't a unique analysis/comparison. I'm sure there's lots of articles out there covering a similar correlation between these two markets, so I'm not claiming originality. Alright, let's go! So we're looking at a correlation between: The S&P500, the behemoth of equity markets and benchmark of US economic healthy/activity (orange on the main chart). XLY:XLP - a custom symbol that looks at the relationship between the Consumer Discretionary Sector (XLY), and the Consumer Staples Sector (XLP). In a nutshell, if this symbol (black on the charts) is moving up, consumers are spending more on discretionary items, and vice versa if it's moving down. The theory is that if consumers are spending on discretionary (read: luxury) items, they are feeling good about their situation and the situation of the economy going forward. The opposite is true if they aren't. Why is this comparison interesting? Basically, these two symbols/markets should move in sync, and do have a strong historic correlation. A rising S&P500 is a sign of economic strength, which means XLY:XLP should be rising along with it. The REALLY interesting things happen when that correlation goes away. Okay, we're going to commence with a review of previous correlation divergences, and a look at what happened to each symbol. By the end of our review you should have an idea of where I'm going with this, but I'll cover it at the end as well. I've created a second chart that is numbered so you can follow which market cycle/time period I'm talking about: 1. 2007-2009 GFC: Okay, let's start with the biggie. I won't go into the history or the fundamentals behind the GFC, so let's look at our charts. It's important to begin by noting that this was the longest correlation divergence of the last few decades - I'll leave you to decide whether that's significant or not. What we can see on our chart is XLY:XLP peaking in late 2004, and forming a series of lower highs until the bottom of the markets fell out in 2007-2008. Contrast that with what happened to the S&P500 in the same period; a slow, steady rise, culminating in a peak in October 2007. What really jumps out at me from studying that period is how a week or two after the S&P500 peaked (was anyone calling it that back then?) the XLY:XLP symbol made multi-year lows (since 2003). Basically, if we take our theory that a rising XLY:XLP is a sign of economic strength, then something was seriously wrong with the US economy from 2004-2007. Of course, we now know that there was. Lastly, because it'll become important later on... the momentum indicator on the main chart (it's based on the S&P500) shows a distinctive pattern seen prior to all market corrections over the last two decades. A series of lower highs; indicative of failing momentum in the market. 2. Market Bottom - 2009: The S&P500 bottomed out in early 2009 after falling 50% in 1.5 years. What we can see from our comparison is another correlation divergence, but a bullish one this time. XLY:XLP formed higher lows, and combined with a S&P500 momentum divergence of the same nature, it was a clear signal that markets had started reversing. I encourage you to check out that period in more detail; in particular, have a look at how XLY:XLP started rising sharply a few weeks before the S&P500 followed suit. It's no secret that the Consumer Discretionary Sector is a market leader in expansions, and that was a perfect sign of how you can use it to time markets - which some people say is impossible! 3. 2011 Downturn: Markets rose steadily for two years until early 2011, when the S&P formed the first of what would be three (roughly) equal peaks. Looking back at XLY:XLP, we can see that it actually topped out at that first peak in February 2011. From there it fell steadily, while the S&P500 sorted itself out and was ready to fall (read: smart money). Markets fell roughly 15-20% before recovering in late 2011. 4. Minor drop? This one is pretty interesting (well, I find it interesting). We can see another correlation divergence in 2014, when the XLY:XLP symbol formed lower highs, while the S&P500 kept rising. What I find interesting is the fact that this didn't lead to any sustained drop... However, if you look at the S&P500 in September 2014, you can see it actually fell quite heavily, and sharply, but recovered quickly. In fact, at it's peak it fell 10% in a month - it was the largest fall since 2011. 2014-2016 - Crazy town: Okay, let's get to one of the stranger periods in the S&P500 over the last few decades. Jumping back to our charts we can see that the S&P500 topped out in (roughly) mid 2015. However, XLY:XLP actually formed higher highs from March 2014 to November 2015. That latter peak was actually formed on a lower high on the S&P500 - clearly, something was askew. Sure enough, markets went haywire, and had two sharp corrections in what was effectively a sideways movement for the entirety of June 2015 - July 2016. One interpretation is the consumers were blindsided by the falls, and it was linked to other factors (do some research, it'll be interesting!). Note: Look at that distinctive bearish momentum pattern on the S&P500... 6. Recovery within a recovery: The S&P500 reached it's 2015 high in July of 2016, but we can see that XLY:XLP symbol was far more sluggish in that period. Fun fact: it wouldn't reach its 2015 high until late in 2017. However, the really interesting thing is that the true S&P500 market expansion didn't occur until the XLY:XLP symbol had its largest single week rise in years during the last week of October 2016. We even see a small correction in the S&P500 in the weeks prior to that. Once consumer discretionary spending recovered and surged, so did the S&P500 for the next 3-4 years (until now!). 7. Today - what's going on? We now reach more recent history. As we all know, the S&P500 has surged higher over the last few years, breaking records along the way. We had a mini crash in late 2018, which was quickly recovered, and today the index sits at all-time highs. Great? Well, yes... and no. My concern (and remember this isn't a prediction - it's an observation on potential risk factors), is two-fold: firstly, XLY:XLP has seriously diverged from the S&P500, and peaked in June of 2018. Since then it's fallen into a distinctive bearish pattern of lower highs, and shows no signs of recovering. Consumers aren't happy or confident for some reason (rising interest rates, trade-war, and Trump are some of my initial thoughts). Combine that with what is by now, I hope, a fairly distinctive and obvious bearish momentum pattern on the S&P500. Momentum has been falling for over a year now (since January 2018), and scarily mirrors previous significant market corrections/downturns... --------------------- Alright. So let's recap... We've had a look at some interesting patterns and correlations that can be found when you create a XLY:XLP symbol, and compare it to the S&P500 Index. We've examined previous market corrections, and hopefully drawn some interesting lessons that we can POTENTIALLY (I can't stress that enough) use going forward. So, what am I saying about the health of the S&P500? Well, nothing really. The market is still rising, and until it's not, that's the only factor that is relevant. Betting against a rising market (especially an intrinsically upward biased one such as the S&P500), is a recipe for disaster. What I am saying is that everything doesn't seem as rosy as the S&P500 would have us think. Consumers are hurting and/or worried, and that's not good for the health of the US economy. Whether that will result in any downward correction is anyone's guess. I'll sign off by saying that I remain long in equity markets. I've seen no sign of a proper correction underway, and in fact I won't until the day that markets fall heavily. I am, however, tightening by stop losses and adjusting my risk management procedures to potentially account for increased market volatility and bearish movements. Okay, that's all for today. It's already an essay. I hope you've learnt something, and found this moderately interesting! Let me know if you have any queries/comments/suggestions. All the best, DD
AMEX:XLY
by DreamsDefined
6
AUD/USD - Potential Move HigherAUD/USD (AU) is potentially set for a move higher. While I haven't entered a trade yet (waiting for confirmation), there are a number of converging factors: AU is sitting at a point of support (trend-line support). NZD/USD (NU) has not followed AU, and appears to be in the process of forming a small double bottom at near-term support (200 Day WMA). NU may be developing a bullish momentum divergence. See the chart in the Update below. AU and NU are highly correlated (+85%), therefore we have a correlation divergence. See the Related Idea below for more information. Nothing is certain in trading, which is why I'm waiting for confirmation before trading. What kind of confirmations can we look for? There are many, and it really depends on your style of trading. A very simple idea is to wait for price to move strongly from the zone it is currently in - but you have to wait for a candle to close on your chosen trading timeframe. I'll keep an eye on this one and update if anything interesting happens. But it will likely be after the fact, so if you're looking at this as a potential trade be sure to monitor it yourself. All the best. DD
Long
by DreamsDefined
Correlation Divergence - GBP/NZD vs GBP/AUDOkay, so today we have a potential correlation divergence trade. As the chart shows, GBP/NZD formed a lower low at Yearly Camarilla S3 Support, but GBP/AUD formed a flat double bottom. Why is this significant? Basically, because these two pairs are highly positively correlated - 90% on a Daily AND Monthly time frame. What one does, the other is pretty much guaranteed to follow. Given that we now have the pairs doing something different, that means we have a correlation divergence. Specifically, we're looking to long GBP/NZD. Correlation divergences are great, and pretty straightforward, trades to make. You take two highly correlated pairs (can do negatively correlated, but positive is easier to visualise on a chart), and look for instances when they start moving differently. I prefer to look at correlations on a higher time frame than I'm actually trading, as this allows you to then jump down to a lower time frame and identify short-term correlation divergences that you can then reliably trade upon. It's simple, but it works. As for potential long targets, there are a few options. Either the previous low at 1.87300ish (4July19) if we're looking at a trend continuation downwards. Or, if this is a proper reversal pattern, we can aim for the resistance zone in the vicinity of 1.911 - 1.919 (the latter is also a Yearly Camarilla Pivot). Hopefully this works out, but nothing is guaranteed. Don't ignore your stop loss, R/R ratio, and trade management knowledge. See the related idea below for more information about correlation trades, and why the AUD and NZD are so closely correlated. Any queries, let me know. DD
Long
by DreamsDefined
How to Trade Correlations for New Traders - AUD/USD vs NZD/USDWelcome! Here's a super simple chart, and strategy, which can help you get started in your trading journey. Trading strongly correlated pairs and looking for divergences is hardly an industry secret. It's a standard technique, and one that is heavily employed by large institutional investors. Basically, correlation means that certain pairs move in a similar fashion. For AUD/USD (AU) and NZD/USD (NU), they are both based on the USD, and the Australian and New Zealand economies are, broadly speaking, based on similar fundamentals. This means that the factors that impact the price of the AU market, will naturally have similar impacts on the NU market. The great thing about the AU and NU correlation is that it's long lasting, and strong. For a few decades now, the pairs have had a 80%+ positive correlation (a positive correlation means two markets move in the SAME direction, whereas a negative correlation means that move in the OPPOSITE direction). This strong correlation has held steady through some significant market events. The exception is a period between 2014-2016, where correlation dropped to a low of 15% - but that was due to a variety of factors that are too in-depth to cover here. However, it's worth stating that if the correlation were to drop below 80% in the future, this strategy/technique would no longer be valid. Hopefully the chart broadly explains things, but in a nutshell: The pairs should move the same. If they don't, e.g. if AU forms higher highs, but NU forms lower lows, that's a correlation divergence. Basically, the markets have moved out of synch for some reason. Often, these are simply short-term phenomenon, and we're counting on the correlation to re-establish itself, allowing us to profit from it. The nature of correlation divergences is that you don't know which pair is going to break first. Therefore, you need a secondary signal in order to make a trade. For example, AU is making higher highs, and NU is making lower highs - which one is going to break? Well, a simple idea is to grab your favourite momentum indicator and look for divergences on either market. On our chart, this plays out in the mid-late April trade. AU is grinding higher, but forming a bearish momentum divergence. Therefore, we're looking for AU to break lower. We can use a moving average, or a trend line break as our confirmation signal to enter the trade. This one worked out wonderfully, but not all of them will. Positive correlations are, like nearly all trading signals, stronger on higher time frames. on a 5min chart, correlations, like the markets themselves, are far more volatile. This is why I would suggest using H4 as your smallest time frame chart, and look at correlations on a Daily basis. A great website to measure/track correlations is www.mataf.net I hope that that all makes sense. I encourage you to try it out for yourself - pick two strongly correlated pairs and start training your brain to look for divergences. And, as with all trading, don't jump on the first correlation divergence you see. You need a secondary confirmation (e.g. momentum divergence, support/resistance), and then a confirmation signal, before making a trade. Trading success is all about how you do things, not what you do. If you have any questions, feel free to contact me. DD
Education
by DreamsDefined
Overall view of NAS100 and US MarketsJune 4th was the beginning of a steep bull trend after the US markets correction of 10% downside. The main reason is the willingness of the Federal reserve bank to lower their interest rate. Last trading week can be summarized by a consolidation between levels 7600.00 and 7425.00, eventually announcing a strong volatility next week. Since we are in a bull run, odds of a continuation remain medium/high. Possible targets : @7600.00 (+1000pips or 100points) and @7860 (+3500pips or 350points). Advice : Stay bullish and buy at any low point while we don't break the 7425.00 bottom level. Correlated pairs : US500 (96.2%),US30 (94.2%),CHFSGS (-86.5%). We are more likely to experience a resumption of the bull spike as it will be for the other US market securities and confirmed by the clue that CHFSGS has shown to have tested a resistance zone and begun a bear run.
OANDA:NAS100USDLong
by Theperfectionist
Overall view of XAUUSD1358.5000 top level was reached after a sharp bull trend. Prices settled on a resistance zone and were subjected to a bear pressure. On the daily chart has formed a lower doji bar, confirming a rejection by the bears to drive the prices higher. 1360.000 is an iconic level since 2016 and prices tend to plunge every time they reach that strong resistance area. Odds of a reversal and a bear run are medium/high. Possible targets : @1320.000 (+2000pips or 20$ per ounce) and @1270.000 (+7000pips or 70$ per ounce). Advice : Stay bearish and sell at any high point while we don't break the resistance zone or 1360.000 top level. Correlated pairs : XBRUSD (brent oil) -92.2%, XTIUSD (crude oil) -87.9%,USDCHF -87.9%, EURUSD 69.3%. We are more likely to experience a strong bull spike with the Energy pairs and USDCHF while a minor effect on the EURUSD.
OANDA:XAUUSDShort
by Theperfectionist
Overall view of USDJPY107.900 level was attempted to be broken downward several times. Prices are around a strong support zone which contains the hypothetical low of the year (The real low is 104.830 due to the gigantic 400 pips fall of January 2nd followed by a massive reversal to the concerned zone). The odds of an upcoming bull run are average to low. Market has been ranging for a while, in preparation of an eventual volatility. Possible targets : @109.180 (+80pips), @110.000 (+160 pips) and @110.500 (+210 pips). Advice : Stay bullish and buy at any low point while we don't break the support zone or 107.900 bottom level. We are close to the bottom level and markets are ranging so the risk is low. Correlated pairs : CADCHF (92.9%), XTIUSD (89.3%) and XAUUSD (-79.7%). We are more likely to experience a ranging market near its bottom as with the CADCHF and XTIUSD. XAUUSD is spiking, therefor this increases the odds of a retest of the bottom levels of the inversely correlated pairs.
Long
by Theperfectionist
Overall View of EURUSD - Update of June 17th week1.13478 top level was reached after a sharp bull trend. Prices settled on a resistance zone and were subjected to a bear pressure. After a strong reversal signal on June 12th, the odds of a bear trend became higher. Possible targets : @1.12000 (+75pips) and @1.11200 (+150 pips). Advice : Stay bearish and sell at any high point while we don't break the resistance zone or 1.13478 top level. Correlated pairs : USDCAD (-87.8%) and XAUUSD (62.5%). We are more likely to experience a strong bull spike with the USDCAD while a minor effect on the XAUUSD . Previous view: Odds of a bear continuation are high, stay bearish and sell at any high points while we don't break the resistance zone or 1.13478 top level. Actual outcome: Prices were side ways with a test of the strong institutional level 1.12000 and forming a daily doji bar. Likewise bulls attempt to reverse the trend failed Actual view: Prices are still subjected to a bear pressure. Odds of a bull trend continuation are high. Possible targets : @1.12000(+20pips) and @1.11400 (+80pips). Advice : Stay bearish and sell at any high point while we don't break the 1.12600 top level. Correlated pairs : USDCAD (-87.8%) and XAUUSD (62.5%). USDCAD is still on a very strong bull spike, confirming that there are more odds for the EURUSD to continue its downtrend.
Short
by Theperfectionist
Overall view of USDCHF - Update of June 17th weekPrevious view: Odds of a bull continuation are high, stay bullish and buy at any low point while we don't break the support zone or 0.98601 bottom level. Actual outcome: Prices were side ways with a test of the strong institutional level 1.00000 and forming a daily doji bar. Actual view: 1.00000 top level attempted to be broken after a sharp bull trend. Prices are still subjected to a bull pressure. Odds of a bull trend continuation are high. Possible targets : @1.0100 (+100pips) and @1.0200 (+200pips). Advice : Stay bullish and buy at any low point while we don't break the support zone or 0.99500 bottom level. Correlated pairs : USDJPY (89.6%), XTIUSD (88.5%), EURCHF (89.2%), XAUUSD (-87.9%). We are more likely to experience a strong bull spike with the USDJPY , EURCHF and XTIUSD pairs. In fact a bullish trend on USDCHF may announce an incoming bearish trend of XAUUSD , actually under sellers pressure.
Long
by Theperfectionist
Divergence between ETH and BTC?Are you worried? ETHUSD Price action pros and cons Bull Case: Trading with in rising channel Holding above 200sma Holding above 50sma Consolidating between $155 and $188\ Lack of strong selling pressure Bear Case: Difficulty staying above the 20sma Lack of strong buying pressure Stoch and AO still have room to move on the downside Alt coins considerable weaker than Bitcoin Correlations: DATE BTC-LTC BTC-ETH ETH-LTC 1/16 ... 0.73 ... 0.26 ... 0.29 4/16 ... 0.94 ... -0.06 ... -0.06 7/16 ... 0.76 ... 0.06 ... -0.08 10/16 ... 0.67 ... 0.38 ... 0.22 1/17 .... 0.65 ... -0.01 ... -0.01 4/17 ... 0.20 ... 0.27 ... 0.1 7/17 ... 0.38 ... 0.19 ... 0.08 10/17 ... 0.64 ... 0.74 ... 0.65 1/18 ... 0.26 ... 0.13 ... 0.67 4/18 ... 0.77 ... 0.76 ... 0.74 7/18 ... 0.93 ... 0.92 ... 0.90 10/18 ... 0.83 ... 0.74 ... 0.87 1/19 ... 0.90 ... 0.88 ... 0.91 4/20 ... 0.86 ... 0.90 ... 0.82 Several articles have likened the recent lagging performance of altcoins to the situation they experience in Jan 2017. The articles have basically pointed out that traders will soon be selling there BTC to buy the cheaper altcoins, such as LTC and ETH. However, I would like to point out how the crypto environment has changed over the last couple of years. Before 1/17 there was often a negative correlation between BTC and the altcoins, but since 4/18 the correlation between the coins has been greater than 0.75. As a quick reminder: altcoins that approach 1 are closely correlated with Bitcoin, altcoins around 0 are not correlated with Bitcoin, and altcoins that approach -1 are inversely correlated with Bitcoin. This measurement is known as Spearman’s rank correlation coefficient. Thus, in this current highly correlated environment we as traders would be wise to keep our eyes on the leaders to predict future price action. Comment and Feedback Welcomed!
BITFINEX:ETHUSD
by SR618
5