Chart traders often find themselves with conflicting commodity trading signals. On the same chart, one man's failing rally is another man's bull flag. While looking at multiple time frames of the same chart can yield drastically different projections. How often has a daily chart given a strong indication one way, only to have the weekly chart totally counteract it in the context of the bigger picture?
One analysis technique I like to use when individual charts are yielding conflicting signals, is correlated chart analysis. For example, while the Dollar Index may yield mixed signals, I can use the Euro, Yen, Pound and Canadian which make up 57, 14, 12, and 10% of the index, respectively, to develop a consensus of the markets traded against the Dollar.
Another example would be to use interest rate futures to determine a bottom in the stock index futures. In times of duress, money flows out of the stock market and into the safer government backed securities. This is the, "flight to quality," so frequently discussed in print and on t.v. Currently, there is much debate as to whether the bottom is in for the stock market or, not. As a trader, I'm not concerned about the rest of the year, only finding quality trading opportunities. Recent statistical analysis is suggesting the stock market rally may continue (see, "Counter Trend Moves...What's Next?) However, conflicting evidence manifested itself during yesterday's stock market decline. The flight to quality generated a significant rally (higher price/lower yield) in interest rate futures. However, it's important to keep in mind that interest rates were rallying off their lowest levels in a month. Yesterday's action suggests a further rally in in interest futures and declining yields over the coming weeks.
So, we now have statistical analysis that suggests a two week rally in both 5yr. Notes and the S&P 500. Has using multiple market analysis created more confusion than clarity?
Fortunately, macro economic theory holds that, in a healthy normal market relationship, we will see a positive correlation between interest rates and stocks. Therefore, if the pressure is off of the stock market and we are turning the economic corner, it is very possible that we see rallies in both of these markets. It is reasonable to suggest that yesterday's correction in the stock market was a necessary correction in a market that bounced off of its lows too far and too quickly. Furthermore, given that the interest rate quadrant did not fall through the June lows as the stock market bounced does suggest that we may be seeing a return to "normal" market behavior. Lastly, given the election season, the Federal Reserve Board is far more likely to cut rates at the next meeting than to raise them.
