BarroMetrics Views: The GBPJPY & ES Correlation
From 2004, the GPBJPY and the S&P pair have exhibited a correlation of 83.4%; from 2007 that correlation has been 93.0%. The more interesting aspect of the correlation is that the GBPJPY usually leads the S&P for swings of a 13-week magnitude by at least 10 weeks to 14 weeks; for swings of 18-day and 5-day magnitude, we usually see lead times of 15 trading days to 30 trading days.
The window of the lead times is so wide that I cannot use the correlations as a stand alone tool. On the other hand, I find the high coincidence very useful for providing supplementary/confirmatory information.
For example:
Figure 1 shows a comparison of the S&P and GBPJPY for the 18-day swing that occurred in the GBPJPY on August 7. The time window for a corresponding S&P high is August 28 to Sept 18. The S&P formed (at this stage) a 5-day and at the same time provided an Upthrust Change in Trend signal (see Nature of Trends) indicating an 18-day line turn. At time of writing, the price projects a target to at least 972.59 (basis cash S&P).
The price action is a good example of the idea that on one hand, the correlation is useful and on the one hand, it cannot stand alone.
The Upthrust setup came on the day of the time window, increasing the probability that we’d see an entry bar.
On the other hand, on Friday September 4, we saw price action that may negate the August 28 high: in the ES (e-mini S&P futures) we saw acceptance above the 50% retracement of the directional move that began on Sept 1. This projects a breach of the Sept 1 high; in turn this suggests a breach of the Aug 28 high.
So the question arises: would such a breach invalidate the correlation for this occasion?
Well, it would depend on what the S&P does after the breach.
- The new high may form a 5-day ‘Three Drives to High” topping pattern and if we then see an 18-day line turn, the correlation would still be valid. Or
- We may not see a breach at all. On Tuesday, the ES may turn South and eventually turn the18-day line down. In this case, the correlation would be valid. Or
- The ES breaches the August 28 high and marches North. In this case, the correlation would be invalidated for this occasion.
The 3 scenarios above need a set of tools that assess which of the three is likely to occur. That assessment cannot be provided by the correlation. For this reason I take the view that the correlation is useful supplementary tool rather than a stand alone.
FIGURE 1 18-day and 5-day S&P
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