I’ve been getting spam from some guy who has a system for trading using “correlation”. I don’t know what his system involves, but there are interesting correlations in the markets; a correlation led me to suspect the selloff we saw in physical commodities today.
Below is the daily chart for the December Canadian Dollar futures. For the first half of October, the Loonie (Canadian Dollar) had a big rally along with the rally in the physical commodities. The Loonie has traditionally has a positive correlation to physical commodities, as much of the Canadian economy is commodity based.
From its peak on October 15th, the Loonie has sold off. I drew two arrows to last Wednesday’s bar; there were two Fibonacci levels of note in play that day. First, 9461 is a 50% retracement of the rally from Oct 2nd to the 15th. A 50 % retracement of the selloff from 10/15 to the low of 10/21 is at 9623; the recovery rally stalled at that level.
Both last Thursday and Friday traded within Wednesday’s range; Friday gave a breakout setup for today (For more on Breakout Trading check out my book here). For today, breakout levels to note were Friday’s low of 9482, the 9461 Fib retracement level, and the 10/21 low at 9447. Also, note that MACD gave a bearish crossover signal.
The breakout setup on Friday is circled
Moving down to today’s intraday chart, we can see that the Loonie has been down for today’s session. I drew the blue vertical line at 7 AM when I go into the office.
This is where the correlation comes in. From a low about 7:20 this morning, the Canadian has rallied in conjunction with a rally in commodity prices (metals, crude oil, grains overnight). In spite of the commodity rally, the Canadian was unable to rally to unchanged on the day-Friday’s close is the blue horizontal line. I felt that one of the two would have to give-either the Canadian would rally to “catch up”, or commodities would follow the lead indicator of the Canadian Dollar and sell off.
From that rally peak shortly after the stock market open, the selloff resumed; the three support levels I pointed out could be used for breakout sales.
Profit objectives are hard to find for this breakout sale. The next Fibonacci support level at 9381, my Trade or Fade service has a first profit objective of 9345.
Breakout points at the red lines
Sometimes it’s hard to see the forest for the trees. Studying correlations and paying attention to them can give you a heads up for markets you’re watching.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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