Tuesday, March 12, 2013

This Chart May Tell Us When A Correction Is Coming

The US Markets have been manipulated by the Fed with essentially endless amounts of money pumped in the market. As a result, a lot of warning signals and negative divergences that have mattered in the past when it came to the Market no longer matter. Fortunately, I believe the Aussie/Yen (shown below), is still a reliable indicator of what the US Markets will do in the future. As, others signals such as the Euro, and the US Dollar are not correlating as they used to with the US Market, the Aussie/Yen is continually working. For some reason, the Aussie/Yen is highly correlated with the S&P 500.

The chart below shows the Aussie/Yen and the S&P 500; the interesting thing about this chart is when the Aussie/Yen and S&P 500 trend in different directions, the Aussie/Yen direction almost always is the direction the US Market quickly correct to. I have highlighted countless times (shown with red lines), when there is a divergent top the S&P 500 ends up following the Aussie/Yen's direction. In the last 6 months, the Aussie/Yen has correctly called the price action in the US Market. During the Fiscal Cliff drama the Aussie/Yen continued to break to new highs, and soon after congress got its act together the US Market followed. In late February the Aussie/Yen was making a lower low, while the S&P 500 was making a higher high. The Aussie/Yen's direction was correct, and the S&P 500, in a hurry, quickly followed. Right now, both are making new highs, so the Aussie/Yen chart is not giving us any warning signs, if the last few years are true, I believe this chart will tell us when the US Markets will have a significant correction (minus the Fed pulling the plug on QE3). Remember, this one of the very fwe correlations/indicators still working, since QE3 has diluted the markets.