Correlation Study - September 10, 2013
A positive linear correlation is usually present between the Copper Continuous Futures contract and the Gold Continuous Futures contract, as depicted by the blue histogram here consistently staying in positive territory. The histogram is showing the coefficient R between the two securities using percentage moves with a rolling period of 6 months. Notice that for the last few years, periods of declining positive correlation have been associated with down-moves and increased volatility for the S&P 500 E-mini (see highlighted periods in sub-graph 3). Keep in mind also that copper has traditionally been viewed as an indicator for economic trends and equity markets. The positive correlation between copper and gold has recently started to come under pressure, which could possibly translate into a period of increased volatility for Futures traders going forward.
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Written by Frederic Palmliden, CMT, Senior Quantitative Analyst, TradeStation.
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