Correlations are arguably just as important in today's macro market place as the economics of individual commodities, currencies, or stock indices. Of the stories I've put out lately the one I appreciated the most was the one that saw the least traffic, which is definitely apropos given the contrarian nature of market analysis.
On April 4th,, in a piece titled: "Capital Market Correlations: Strong USDJPY = Status Quo", regarding the move by the Bank of Japan and the subsequent collapse of the Yen, I wrote, "Because of the current long-term price pattern set by underlying economics - namely coordinated central banker policies…we favor the Australian Dollar to join U.S. blue chip stocks and re-assume a leadership role."
What is cool about market analysis is the pattern we see on the chart is always going to be a reflection of underlying fundamentals. So when we see a large move, such as we saw in the Yen last week, we know that the news is in-line with the overall trend, and just as important, this will support the overall trends in the other financial markets, which, in the case of both U.S. stock indices, and the Australian Dollar were bullish. The overall pattern in gold however, as determined by the direction of the Day to Day and Secondary Pattern was bearish. Given the objective direction of the patterns in place prior to last week's collapse of the Yen, the subsequent rally in the Australian Dollar and U.S. stock indices, and today's sharp sell-off in gold make plenty of sense to us.
As for the future direction of these markets? It is gospel to us that markets patterns are not only a reflection of the underlying fundamentals --which are unlikely to change any time soon-- but also repetitive. For our money we like buying dips in markets where that has been working, and selling rallies in markets where that has been working.
Jay Norris is the author of The Secret to Trading: Risk Tolerance Threshold Theory. To see Jay highlight trade set-ups and signals in live markets go to Live Market Analysis
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.