Tuesday, February 26, 2013

Follow The Leader

Much has been said about the latest source of stock market rally - the weak Yen. It is back as the favorite carry trade, and EUR/JPY is the biggest beneficiary. So I decided to plot it over SPX, and the result is even better than I thought. EUR/JPY has been leading SPX since the latest leg of the rally began in mid-November. Based on this fact, it is safe to assume that SPX is in for more pain on the downside. There was a pretty negative and decisive reversal on SPX yesterday, but it really came on the heels of EUR/JPY divergence. It did not confirm the highs on SPX for over two weeks now. Forex likes to hunt for stops, and there are stops all the way down to flat-on-the-year on EUR/JPY. If SPX follows, and it has so far, it will also retrace to that flat-on-the-year level.

Please note that I used SPX futures to better reflect the correlation, as forex trades 24 hrs a day.

click on chart to enlarge

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