Using Inter-Market Correlations and Seasonals...

So, we had the Index/Equity market sell off as mentioned in the previous post regarding the VIX Index. This accelerated further on weak US jobs data. The fact it is an election year further supports more of a sell off. So how could we use this to our advantage? Firstly, it is important to note the general correlations in the market (these are the normal correlations we see in trending markets; these can obviously change):


Stocks move in the OPPOSITE direction to Bonds
Stocks move in the OPPOSITE direction to Commodities
Stocks move in the SAME direction as US Dollar
Bonds move in the OPPOSITE direction as Commodities
Bonds move in the SAME direction as US Dollar
Commodities move in the OPPOSITE direction as US Dollar


We have seen Bonds moving up in the recent week on risk aversion, which supports the equity sell off. Therefore, matching strength and weaknesses one could look at a commodity moving higher and the US Dollar selling off, in line with the correlations. If we take this one step further and look at the seasonal bias, USDCAD seems quite interesting as this has an inverse relationship to oil prices. As USDCAD strengthens, Oil falls and vice versa. USDCAD has fallen 8 out of the past 10 years and is seasonally a bearish period. 


Looking at the USDCAD chart below shows a potential level of horizontal resistance and the 38.2 retracement, however you need to follow your own trading rules on potential entries/exits as all of the above is just a potential bias. Now the chart is clearly going sideways and isn't the best pair to trade, however, the bias is to the short side. This is nullified if we get a significant break through the resistance level. 

Using the same analysis above, AUDUSD also looks like a potential long opportunity: