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TheStreet Open House

E-mini S&P and Japanese Yen Correlation

Stock quotes in this article: FXY, SPY

E-mini S&P and Japanese yen correlation gives way to bearish divergence.

By Kathy Garber

Some traders like to watch for correlation between S&P 500 futures and Japanese yen futures. So let's take a look at both. The S&P continues to move to the upside with symmetrical pullbacks since the October 2012 bounce off of 1317.

The yen has fallen mercilessly since October 2012. However, it has failed to make consecutive lower lows since the May 2013 low of 0.009648. So these two instruments had correlation in the opposite direction until May-June 2013; then they began to diverge.

E-mini S&P 500 futures daily chart
E-mini S&P 500 futures daily chart


First, the ESZ13 daily chart shows price keeps making higher highs and higher lows while holding inside a pitchfork channel. That sentence is the definition of an uptrend. But as a chart analyst, I seek other clues than the obvious. Until July 2013, price had held way above the pitchfork channel support line. Price breached below the channel line for one day, then continued to reach a new high.

The next test of the same pitchfork channel support line, it breached below it further and held below the line for several days before pushing back above the channel line and again making a new high. But notice this new high fell short of reaching the pitchfork midline.

The most recent test of the channel support line was October 2013, when the market made a more distinct push below the support but again failed to hold below the support. So this is a subtle statement: Even though price is making higher highs, there are increasing efforts to push below an annual support line and the highs are struggling at best to reach the midline of the channel. Does this mean price is going to go down now and there are no further upside targets? Absolutely not, but it does suggest to be aware of how price behaves during the next test of the channel support line.

So on that note, technical analysis suggests we should watch for a hold above 1775.75. This is a confluence region -- there are upside targets derived from Fibonacci extensions and ABCD harmonic pattern targets. When different rotations have levels that meld together at a specific region, then it becomes a magnet and an important test of either support or resistance, in this case, resistance.

A hold below 1775.75 implies a pullback to test the channel support line. Note if the symmetrical pullback scenario continues, price will push further below the channel support and the target is the 1673.75 area. It will be important if price gets to the 1673.75, if it bounces from there or fails to hold there, so that is a definite area to protect any profits if already in a short position.

December E-mini Japanese Yen Futures daily chart
December E-mini Japanese Yen Futures daily chart
Now let's look at the yen. Before October 2012, price began to fall. Then in May 2013, price failed to make lower lows but has continued to make lower highs and thus began a contraction mode in the shape of a triangle. This is different from the S&P, which has continued to make higher highs and higher lows. This is the divergence of trends.

So is the yen making a statement that it has lost the momentum to continue to the downside, and will that have an impact on the S&P's upside continuation? Well, there are no crystal balls concerning the markets, only probabilities. Here's the thing about triangles: They can literally break out in either direction, and once there is a break, it is typical for a return to the breakout point to verify it is a true breakout.

Now generally speaking, it is a raising of the eyebrow when a move begins to stall and consolidates; it is considered a yellow flag for directional bias. The fact that the yen is contracting into an apex, similar to it holding its breath, means at some point there comes the time for expansion or exhale.

The apex is approaching; this is where the triangle support and resistance lines meet so a break above or below the triangle lines are an initial clue of bias. A retest and hold increases the probability of continuation in that break direction. Keep in mind that triangles are typically inside a sideways range, so the triangle is the initial break. In this case the yen has opposing emerging harmonic patterns and the determining levels are either above 0.010656 or below 0.009648.

Above 0.010656 invalidates the brown Butterfly/Crab harmonic pattern; a hold above there has the ideal target at 0.011819 and scaling points at the green Fibonacci levels. Below 0.009648 invalidates the green Butterfly/Crab harmonic pattern and has the ideal targett at 0.009025 with scaling points at the brown Fibonacci levels.

As always, use stops and keep an eye on the 10-handle rule. Don't forget to catch MrTopStep on The Closing Print video found under the OptionsTV page (top bar). We report directly from the SPX pits, wrapping up the day and positioning for trade tomorrow.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

MrTopStep can be followed on Twitter at twitter.com/MrTopStep

For LIVE futures chat, more information on the 10-handle rule and futures educational content CLICK HERE FOR A SEVEN-DAY FREE TRIAL.

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