The Futures / Inter Market Report

Trading the World’s Markets                            

May 16, 2008

                                            
Matthew Caruso, CMT                                  
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Swiss franc ready for another move higher

            A great deal of market turmoil was experience in the recent market debacle which was exacerbated by the bear sterns fiasco. In the midst of the U.S. market fall on of the largest beneficiaries was the Swiss franc (for more on how to hedge against a bear market in U.S. stocks, please see the July issue of Stocks & Commodities in which I will have an article published on this issue). Back in March I was bullish as they came when I saw that extreme sell off on the Bear sterns news. I wrote about it here and one of the intermarket tools I used to identify the U.S. market bottom was how the Swiss franc had become near parabolic. Well the rest as they say is history. The S&P leaped upward and the Swiss franc corrected.    

            The Swiss franc which was loved several weeks ago by investors is now being scorned. Falling prices tend to make people bearish on a market and so this is no surprise. What is important is trend. I have said it before and will say it again, the trend is basis for all profits and without it it is next to impossible to take big moves out of the market. So if the long term trend is up and prices are falling in a correction, you will want to become bullish, not bearish! However, as you have seen in crude oil recently, climbing prices in an uptrend can last for a long time even though everyone is bullish. The trend is what allows traders to make money of psychology. Bullish sentiment in an uptrend and bearish sentiment in a downtrend is rather meaningless except when it gets the point where it is hitting major media outlets as in rice recently (which is still collapsing after being mentioned here 1 week prior to the top) and the U.S. market in March (also mentioned here). 

            The long term trend for the franc is still up and people are bearish. This is very bullish and can be seen in figure 1. As well, accompanying this setup is a good deal of buying by the commercial traders. They now have one of their largest positions in over a year, and are actually have a larger long position now than when the Swiss franc was lower. This is unusual and very bullish. 

            To top off all we’ve discussed is Larry Williams’ vix index which is now above its upper Bollinger band and is signaling an over bought situation. This indicator is available in the December issue of Active Trader Mag. And I suggest you read the article.

Figure 1 chart by genesisft.com 

            Accompanying our bullish set up is the support the franc is receiving from the uptrend lines in figure 1. As well, as can be seen in figure 2, the short term down trend lines has been broken and a climb above .9628 would signal the start of a short term trend change back to up for the franc. As well, the MACD which is a lagging indicator is just about to turn higher and is likely signaling the recent low were an important bottom.

Figure 2 chart by genesisft.com 

            The inevitable question will be, “does this also mean the U.S. stock market will fall if the Swiss franc climbs?” If you take a look at figure 3 you will see the very strong inverse correlation between these two markets. The answer is that it is very likely that the S&P will correct as well. It is overbought and a correction would be healthy. However, these correlations cannot always be depended on. I think it is imperative to trade each market as you see it and not anticipate a correlation with another market to continue. If you look at figure 4 which is similar to fiigure3 but is a longer term chart, you will see that the strong inverse correlation virtually disappears.  Use the current correlations as part of your work, but it cannot be relied upon as the base of your work. The relationships often change and you’ll be left confused and likely less wealthy if that happens and it is your sole reason for getting into the market.

Figure 3 chart by genesisft.com

Figure 4 chart by genesisft.com                       

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