Stocks May Be Ready to Rebound, Currencies Show

NEW YORK ( TheStreet) -- In my years of trading, I have always found it interesting how different asset classes relate to one another.

But it's better knowing how to use these relationships to gauge market sentiment and direction. I know a lot of people are wondering when the bloodshed in the S&P 500 Index might subside. Several things are giving us clues that the selling may be soon be over, at least temporarily.

There are several markets I like to monitor, but today I will focus on the Japanese yen and the euro. For those not familiar with the yen, it tends to be bought in times of market turmoil and uncertainty due to its perceived stability. The euro is useful in determining risk appetite and consumer sentiment. As a matter of fact, when I am intraday trading the S&P 500, the Dow or bonds, I will have an intraday chart of the euro up as well.

In my experience, there are no "always" relationships in the markets. In other words, various nuances and inter-market relationships do not always show a positive or negative correlation. However, I have found the euro to be an extremely good indicator in trading other markets.

One need only spend a few days watching the markets intraday to see how quite often the euro will tick up, and the S&P 500 follows suit. The euro ticks down, and the S&P 500 tags along. The correlation tends to be quite strong.

The Japanese yen, on the other hand, can be a great indicator as well, especially when it comes to volatility and uncertainty. Since 2008, I recall several instances of the yen jumping several hundred points or more as the S&P 500 got hit below the belt and risk assets were imploding before our eyes. Although I do not find the yen quite as useful intraday as the euro, I still monitor the yen, which gives me a "feel" for investor sentiment.

What I am seeing right now is a bullish divergence. The yen has come under enormous pressure in the past two sessions as the Japanese elections will be coming around sooner than expected. The expected winning party is discussing various measures including negative interest rates, thus putting pressure on the yen. That all makes a lot of sense.

However, even with such scenarios, the yen would likely strengthen if there was a 2008-like market meltdown in the works. Even if the yen did not strengthen, it is hard to imagine the currency falling over 300 ticks in two days if risk assets were really on the verge of a large-scale breakdown. Definitely something worth keeping an eye on.

That brings me to the euro, the red-headed stepchild of currencies. We all know the troubles this currency has seen in recent years. In addition, the eurozone still faces the monumental task of getting the debt crisis under control. The markets watch headlines regarding Greece on a daily basis. Spanish and Italian bond yields are monitored quite closely for spikes. Despite all of this, the euro has not imploded.

As a matter of fact, the euro recently held support at the 1.26 area and is now threatening to turn up on the daily chart. Very interesting price action, given the recent market turmoil here.

The price action in these two currencies, I feel, is bullish for stocks. The turn may not come today, tomorrow or next week, but if present trends continue, it is only a matter of time before risk appetite becomes voracious again.

I have found the yen and euro to be great indicators, and the euro, specifically, is a useful leading indicator. For anyone out there wondering when may be the time to start buying risk again, keep a close eye on these currencies. They may just prove to be an invaluable addition to your trading arsenal. Please note today is Nov. 15, and all trade data is based on the most recent information.

Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders.

Commodity Futures Trading Commission disclosure for licensed brokers: This material is conveyed as a solicitation for entering into a derivatives transaction.
Matt Zeman is a trader at Kingsview Financial. He began his trading career as a runner in the grain pits at the Chicago Board of Trade before becoming an arbitrage clerk. Eventually he started trading equity options and stocks. Matt now is a full-time futures broker. He has been a frequent guest on CNBC, Fox and Bloomberg, and provides his views on the stock, bond and futures markets for financial media including Dow Jones, the L.A. Times and The Associated Press. Matt is a member of the Chicago Board of Trade, and carries series 3, 7 and 66 licenses.