Traders can use price break chart events in one market as leading indicators for directional moves in another market. This makes sense when markets' movements are highly correlated. Many of these intermarket comparisons have cycles of correlation. At times, the correlations, measured by R squared, may be in the 90s, while at other times they may disconnect. If the correlation data is accessible, it is a good idea for the trader to check the status of the daily correlations.
One conventional approach is to use what can be called contemporaneous visual correlation. This involves scanning the charts of both instruments to determine visually if their movements are synchronous. There are many examples of such correlations.
The relationship between the equity markets and the yen, shown in Figure 6.1, is an important intermarket correlation that traders follow. These correlations can reach over 90 percent. Sometimes the S&P 500 leads the way, and at other times, the yen leads the way.
Generally, the expressed sentiment relates to global risk aversion or risk appetite. When the U.S. equity markets are attractive, they act as a magnet for capital. As a result, yen investors borrow yen at near-zero interest rates and leverage their yen into other assets, namely U.S. markets. The correlations are very close, as can be seen in the chart in Figure 6.2. The ...