Correlation and Leading/Lagging?
- Thread starter hcour
- Start date
http://tinyurl.com/dmc48
http://tinyurl.com/b846u
Focusing on the EURO futures. First chart is the 3/06 CHF and EURO going back 2 yrs. Top pane is the spread, EURO-CHF, 2nd pane is the 21-day correlation of these very strongly postively correlated markets.
First, note the the correlation is almost perfect during trends, and that the most significant abberations in correlation (when it drops down to .80 or below) occur as price begins to consolidate significantly, either for a reversal or continuation following a strong trend.
Second chart zooms in on price since the consolidation started in July. 11/04 the Euro breaks July support on strong vol but there is no follow-thru as price ambles sideways to Dec, a possible shakeout. There is an attempt to rally back into the trading-range starting 12/12 on good vol, it peters out, but the subsequent reaction 12/20 -12/30 goes sidways on low contracting vol and is a shallow test of the SO. 1/05 a huge gap up back into the trading-range on relatively strong vol, then sideways consolidation to 1/20 w/little retracement. 1/23 a relatively wide spread up closing on the high, sitting at the middle of the range and at the flattening 200d ema. Here price struggles the next 2 days on weak closes, then 1/27 a good spread down closing on the low on strong relative vol but there is no immediate follow-thur as Mon a narrow spread doing nothing.
Note the possible convergence of the flattening 20d, 50d, and 200d ema's as short/intermediate/long-term volatility contract in the latter part of the trading-range following a higher volatility period starting Sept.
Also note that the EURO tends to lead the CHF, as apparent by the spread. Presently the latest rallies and reactions are showing more strength on the EURO relative to those of the CHF.
All taken together - price action, volume, spread, correlation, volatility - suggest to me that this trading-range may be coming to an end soon, building a cause for a strong trend, and though there may be further consolidation yet, of course, thus far it seems the bias is for accumulation during this long base, so looking for a breakout.
For a confirmation of a breakout (or breakdown if price eventually presents itself thusly) and trend I would look to the 21-day correlation in addition to the pv action. If it continues at this present strong correlation, or if the next abberation is shallow relative to those last two spikes, this may confirm the trend; if a greater abberation occurs I would look for even further consolidation.
Harold
http://tinyurl.com/b846u
Focusing on the EURO futures. First chart is the 3/06 CHF and EURO going back 2 yrs. Top pane is the spread, EURO-CHF, 2nd pane is the 21-day correlation of these very strongly postively correlated markets.
First, note the the correlation is almost perfect during trends, and that the most significant abberations in correlation (when it drops down to .80 or below) occur as price begins to consolidate significantly, either for a reversal or continuation following a strong trend.
Second chart zooms in on price since the consolidation started in July. 11/04 the Euro breaks July support on strong vol but there is no follow-thru as price ambles sideways to Dec, a possible shakeout. There is an attempt to rally back into the trading-range starting 12/12 on good vol, it peters out, but the subsequent reaction 12/20 -12/30 goes sidways on low contracting vol and is a shallow test of the SO. 1/05 a huge gap up back into the trading-range on relatively strong vol, then sideways consolidation to 1/20 w/little retracement. 1/23 a relatively wide spread up closing on the high, sitting at the middle of the range and at the flattening 200d ema. Here price struggles the next 2 days on weak closes, then 1/27 a good spread down closing on the low on strong relative vol but there is no immediate follow-thur as Mon a narrow spread doing nothing.
Note the possible convergence of the flattening 20d, 50d, and 200d ema's as short/intermediate/long-term volatility contract in the latter part of the trading-range following a higher volatility period starting Sept.
Also note that the EURO tends to lead the CHF, as apparent by the spread. Presently the latest rallies and reactions are showing more strength on the EURO relative to those of the CHF.
All taken together - price action, volume, spread, correlation, volatility - suggest to me that this trading-range may be coming to an end soon, building a cause for a strong trend, and though there may be further consolidation yet, of course, thus far it seems the bias is for accumulation during this long base, so looking for a breakout.
For a confirmation of a breakout (or breakdown if price eventually presents itself thusly) and trend I would look to the 21-day correlation in addition to the pv action. If it continues at this present strong correlation, or if the next abberation is shallow relative to those last two spikes, this may confirm the trend; if a greater abberation occurs I would look for even further consolidation.
Harold
http://tinyurl.com/map87
USD/CHF & EUR/USD, hourly, 12/20/05 - 1/04/06.
During a consolidation following an uptrend there is either distribution for a reversal to a downtrend or re-accumulation for a resumption of the uptrend, following a downtrend there is either accumulation or re-distribution. During trend price is more consistent, there is less noise, during a consolidation there is much more noise; in a trend volatility is high, in a range volatility contracts. A trend is an orgasm, a consolidation is the foreplay that prepares for it. It would seem reasonable to assume that mkts are most strongly correlated during trends and less-so during ranges.
In the first part of the chart, the 20th-22nd, both mkts are coming off a strong trend and they both start to consolidate at abc where they continue to be strongly and obviously inversely correlated. In the middle of the trading-range correlation becomes skewed: The 27th on the CHF there is an upthrust of C while the EUR stays well away from its low at C, so it has no corresponding shakeout. Of course at this point we don't know this is an UT on the CHF and we can note that it is clinging to the top of its range on shallow retracement, relative to abc, while the EUR is staying well off the bottom of its abc range. So both mkts are at least suggesting accumulation at this point in the trading-range, rather than one indicating distribution and the other accumulation. But we know that they both won't trend strongly the same way, so something has to give re: accumulation/distribution relative to what happens on the breakout of the range.
On the 28th the EUR has a strong rally to the top of the range at b, which subsequently turns out to be an upthrust. The CHF has a similar opposite reaction but does not drop to b, so we have the other side of the picture as there is no corresponding CHF SO to the EUR UT. The 28th ends w/both markets reversing strongly, wiping out the earlier moves, but once again the CHF upthrusts C w/no corresponding SO of C by the EURO. From here the CHF has a shallow reaction the 29th followed by another UT of C, while the EURO once again does not spring C. As of the 30th, following the abc climaxes that define the trading-ranges, the CHF has clung to the top of its range while the EUR has stayed off its range lows, both suggesting accumulation in the range and thus low correlation.
On the 30th there is a change of character in this relationship as the CHF once again upthrusts C and all previous highs, but this time there is an equal and opposite reaction in the EUR as it shakes out C and all previous lows for the first time in its range. High inverse correlation. At X it appears all the upthrusts have caught up w/the CHF on a shallow test, while the EUR has a corresponding shallow test of its big shakeout. From here the mkts remain strongly correlated on their respective breakdowns/breakouts on 1/03, intiating new trends in each.
H
USD/CHF & EUR/USD, hourly, 12/20/05 - 1/04/06.
During a consolidation following an uptrend there is either distribution for a reversal to a downtrend or re-accumulation for a resumption of the uptrend, following a downtrend there is either accumulation or re-distribution. During trend price is more consistent, there is less noise, during a consolidation there is much more noise; in a trend volatility is high, in a range volatility contracts. A trend is an orgasm, a consolidation is the foreplay that prepares for it. It would seem reasonable to assume that mkts are most strongly correlated during trends and less-so during ranges.
In the first part of the chart, the 20th-22nd, both mkts are coming off a strong trend and they both start to consolidate at abc where they continue to be strongly and obviously inversely correlated. In the middle of the trading-range correlation becomes skewed: The 27th on the CHF there is an upthrust of C while the EUR stays well away from its low at C, so it has no corresponding shakeout. Of course at this point we don't know this is an UT on the CHF and we can note that it is clinging to the top of its range on shallow retracement, relative to abc, while the EUR is staying well off the bottom of its abc range. So both mkts are at least suggesting accumulation at this point in the trading-range, rather than one indicating distribution and the other accumulation. But we know that they both won't trend strongly the same way, so something has to give re: accumulation/distribution relative to what happens on the breakout of the range.
On the 28th the EUR has a strong rally to the top of the range at b, which subsequently turns out to be an upthrust. The CHF has a similar opposite reaction but does not drop to b, so we have the other side of the picture as there is no corresponding CHF SO to the EUR UT. The 28th ends w/both markets reversing strongly, wiping out the earlier moves, but once again the CHF upthrusts C w/no corresponding SO of C by the EURO. From here the CHF has a shallow reaction the 29th followed by another UT of C, while the EURO once again does not spring C. As of the 30th, following the abc climaxes that define the trading-ranges, the CHF has clung to the top of its range while the EUR has stayed off its range lows, both suggesting accumulation in the range and thus low correlation.
On the 30th there is a change of character in this relationship as the CHF once again upthrusts C and all previous highs, but this time there is an equal and opposite reaction in the EUR as it shakes out C and all previous lows for the first time in its range. High inverse correlation. At X it appears all the upthrusts have caught up w/the CHF on a shallow test, while the EUR has a corresponding shallow test of its big shakeout. From here the mkts remain strongly correlated on their respective breakdowns/breakouts on 1/03, intiating new trends in each.
H
Very nice thread. Food for thought.
Thanks hcour and mark.
Thanks hcour and mark.
http://tinyurl.com/lq9wc
EUR and CHF, daily:
Coming off a longer-term downtrend and a consolidation/re-distribution off to the left, this chart begins w/a downtrend from A to B to C into a new trading-range, during which time the markets are highly positively correlated as far as support/resistance and relative retracements. This continues into the first part of the range, though the correlation breaks down a bit on the rally to D, but the lead/lag still continue to catch up w/each other on the retracements to significant s/r.
Then on the reaction to X, as volatility starts to contract and the trading-range continues to evolve, the correlation starts to break down more significantly and consistently. At Y CHF retraces much deeper on a minor spring, as it does again at the test of the spring at Z. The subsequent nice rally is significantly stronger on the EUR followed by the reaction to 3/24 that is much more shallow on the EUR, as of this posting.
So there's a change of character in the correlation: The apparent, possible accumulation in EUR is outperforming the apparent, possible distribution in the CHF. It seems the strength of the stonger market may be greater than the weakness of the weaker market, if that makes any sense...
(hircsh - Thanks for your interest!)
H
EUR and CHF, daily:
Coming off a longer-term downtrend and a consolidation/re-distribution off to the left, this chart begins w/a downtrend from A to B to C into a new trading-range, during which time the markets are highly positively correlated as far as support/resistance and relative retracements. This continues into the first part of the range, though the correlation breaks down a bit on the rally to D, but the lead/lag still continue to catch up w/each other on the retracements to significant s/r.
Then on the reaction to X, as volatility starts to contract and the trading-range continues to evolve, the correlation starts to break down more significantly and consistently. At Y CHF retraces much deeper on a minor spring, as it does again at the test of the spring at Z. The subsequent nice rally is significantly stronger on the EUR followed by the reaction to 3/24 that is much more shallow on the EUR, as of this posting.
So there's a change of character in the correlation: The apparent, possible accumulation in EUR is outperforming the apparent, possible distribution in the CHF. It seems the strength of the stonger market may be greater than the weakness of the weaker market, if that makes any sense...
(hircsh - Thanks for your interest!)
H
EURO fut & CHF fut daily: http://tinyurl.com/zsj3u
EUR/USD & USD/CHF 60-min: http://tinyurl.com/hhqqc
You know that feeling when you're seeing something in a chart, you know it's there, but you just haven't got a handle on exactly what you're sensing yet? It's like those paintings that were popular a few years ago, they were abstract until you stared at them long enough and relaxed and learned to focus on them in certain way and all of a sudden, yo! There was a coherent picture! That's kind of the experience of chart hindsight, the after-the-fact smack to the forehead, "Of course! That's what's I've been seeing all along! I am Fortune's Fool!"
Daily: As should be apparent from my previous analyses of the EUR daily, I've had a bullish (demand) bias re the evolving price action w/in the long trading-range and also via the correlation w/the CHF. From the 10th thru the 13th (we know what's happening today) note how, unlike the non-correlated nature of the previous swing highs/lows, at this consolidation both pullbacks are at about the 62% retracement of the 3/24 swing low and thus correlated.
60-min: These charts start w/sharp trends for 3 days, then on the 7th at A there is possible climatic behavior in short-term oversold/overbought conditions via the demand/supply lines, price action, bar spreads and closes. This followed by shortening of downward/upward thrusts on the 10th at B, then subsequent breaks of their respective trendlines as they each have gone into a trading-range defined by the purple lines. Subsequently they both exhibit classic TR behavior; in the beginning there is still some volatility on relatively wide (but contracting) price swings and individual bar spreads. Then after C on the 12th and especially D to E the swings and spreads start to seriously contract to relatively itsy-bitsy dojis, as each mkt forms an apex.
B is a shakeout of A on EUR and an equal and correlating upthrust on CHF. But C is a shakeout of B on EURO while a shallow test of B on CHF. AT D a positive test of C on EUR and a very shallow, weak test of C on CHF. From C to E both mkts flatline in the apex, the EUR sitting smack in the middle of its range, off the lows, while the CHF clings to the bottom of its range.
Presently w/in the trends note how the CHF has dropped out of its channel and broken previous support easily and appears to be short-term oversold while the EUR clings to the top of its channel and still has a ways to go before that next resistance and is not nearly as overbought.
On the daily chart still w/a bullish bias for the EUR w/in the long trading-range and wondering if it's breakout time...
H
EUR/USD & USD/CHF 60-min: http://tinyurl.com/hhqqc
You know that feeling when you're seeing something in a chart, you know it's there, but you just haven't got a handle on exactly what you're sensing yet? It's like those paintings that were popular a few years ago, they were abstract until you stared at them long enough and relaxed and learned to focus on them in certain way and all of a sudden, yo! There was a coherent picture! That's kind of the experience of chart hindsight, the after-the-fact smack to the forehead, "Of course! That's what's I've been seeing all along! I am Fortune's Fool!"
Daily: As should be apparent from my previous analyses of the EUR daily, I've had a bullish (demand) bias re the evolving price action w/in the long trading-range and also via the correlation w/the CHF. From the 10th thru the 13th (we know what's happening today) note how, unlike the non-correlated nature of the previous swing highs/lows, at this consolidation both pullbacks are at about the 62% retracement of the 3/24 swing low and thus correlated.
60-min: These charts start w/sharp trends for 3 days, then on the 7th at A there is possible climatic behavior in short-term oversold/overbought conditions via the demand/supply lines, price action, bar spreads and closes. This followed by shortening of downward/upward thrusts on the 10th at B, then subsequent breaks of their respective trendlines as they each have gone into a trading-range defined by the purple lines. Subsequently they both exhibit classic TR behavior; in the beginning there is still some volatility on relatively wide (but contracting) price swings and individual bar spreads. Then after C on the 12th and especially D to E the swings and spreads start to seriously contract to relatively itsy-bitsy dojis, as each mkt forms an apex.
B is a shakeout of A on EUR and an equal and correlating upthrust on CHF. But C is a shakeout of B on EURO while a shallow test of B on CHF. AT D a positive test of C on EUR and a very shallow, weak test of C on CHF. From C to E both mkts flatline in the apex, the EUR sitting smack in the middle of its range, off the lows, while the CHF clings to the bottom of its range.
Presently w/in the trends note how the CHF has dropped out of its channel and broken previous support easily and appears to be short-term oversold while the EUR clings to the top of its channel and still has a ways to go before that next resistance and is not nearly as overbought.
On the daily chart still w/a bullish bias for the EUR w/in the long trading-range and wondering if it's breakout time...
H
here's a killer resource...
http://www.mataf.net/en/analysis-correlation_id.htm
how about them apples/pips??? What's important about correlation is the latter part of the thread title. Just follow the leader... It is easier to pick out than using indicators...
Kind Regards,
MAK
http://www.mataf.net/en/analysis-correlation_id.htm
how about them apples/pips??? What's important about correlation is the latter part of the thread title. Just follow the leader... It is easier to pick out than using indicators...
Kind Regards,
MAK
EUR/USD & USD/CHF - 60-min chart:
http://tinyurl.com/gguln
At E there is a breakout on the EUR as the CHF breaks down and they both trend well to F, where there is a shortening-of-thrusts on both, EUR upthrusting and CHF springing (shakeout). At G the CHF reaction is deep while the EUR is shallow, therefore uncharacteristically more positively correlated than the norm as demand is there in both mkts. This unusual relationship continues as from H both mkts trend up w/higher-highs and higher-lows to I, the EUR leading and the CHF much more subtle w/in a trading range and unable to follow-thru on what become upthrusts. At I they become inversely correlated and CHF then catches up w/EUR.
Presently EUR is in a very nice channel, however it is at significant resistance on the daily where one might reasonably expect supply. The 60-min is in an overbought condition at the channel supply line and has just had the widest down spread closing on the low since E, breaking the short-term tl which traversed the channel, while the CHF may be breaking out of its channel.
H
http://tinyurl.com/gguln
At E there is a breakout on the EUR as the CHF breaks down and they both trend well to F, where there is a shortening-of-thrusts on both, EUR upthrusting and CHF springing (shakeout). At G the CHF reaction is deep while the EUR is shallow, therefore uncharacteristically more positively correlated than the norm as demand is there in both mkts. This unusual relationship continues as from H both mkts trend up w/higher-highs and higher-lows to I, the EUR leading and the CHF much more subtle w/in a trading range and unable to follow-thru on what become upthrusts. At I they become inversely correlated and CHF then catches up w/EUR.
Presently EUR is in a very nice channel, however it is at significant resistance on the daily where one might reasonably expect supply. The 60-min is in an overbought condition at the channel supply line and has just had the widest down spread closing on the low since E, breaking the short-term tl which traversed the channel, while the CHF may be breaking out of its channel.
H
If you think on the Fast Fourier Transform, it seeks to resolve the individual cycles that make up the whole. It's success depends on how regular and how long-repeating the individual components are.
From your discussion, it sounds like currency fluctuations might be the sum of individual policies of large players. Have you had any success in separating out the individual actors by volume or trend?
From your discussion, it sounds like currency fluctuations might be the sum of individual policies of large players. Have you had any success in separating out the individual actors by volume or trend?
In order to derive more useful information from correl coeffs you really should be using stationary data - ie: detrended. This is a very common mistake.
The easiest method to introduce stationaratity to a time series is to use differences. That is, subtract the close from the previous close and measure correlation on this time series.
Good luck.
The easiest method to introduce stationaratity to a time series is to use differences. That is, subtract the close from the previous close and measure correlation on this time series.
Good luck.