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Looking at the Correlation between the DJIA and the USDJPY

Wednesday, 22 April 2009 20:42

I have had a few questions about using the DJIA as a gauge to trade in the forex market. So the first thing we need to do is take a look at the directional correlation between the two. Now the following chart is not reflective of percent gain or loss. I just copied one and pasted it over the other, so you could see the similarities in movement over the trading day.

You can see that the directional correlation between the two roughly follows one another. When I decide to answer this question this morning the first thing I did was shoot myself an email, so that I had a directional bias with a time stamp on it, and a direction for the close of the day. Here is that email.

Other than the horrible spelling, I was pretty right. But how did I arrive at this conclusion?
In the above chart the first thing I noticed was that there was a longer term

Resistance line that had been hit by the USDJPY on the move higher and price had subsequently fallen, breaking a longer term support line. I figured then that the daily tone would be a close toward the bottom side of the daily

Range. Now all of you that follow my emails also know that I am short this pair right now, so I have a reason for thinking that the USDJPY will eventually hit 97.20. I factored that into my reasoning and viola, after testing the top side one last time in late afternoon trade the DJIA lost over 156 points in the last hour to close below the daily open.
Now let’s make one more educated guess about a price that should print tomorrow. I think that 7932 should print sometime tomorrow. That means the USDJPY could follow the DJIA higher but could start from a much lower place if Asian traders look at the late US loss and send futures and the USDJPY lower

Overnight.
But I didn’t need to look at the correlation between the DJIA and the USDJPY to guess that the USDJPY would have at best an even day. All I needed to do was look at the USDJPY’s support and resistance to determine where I wanted to be with the pair.

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