INTRODUCTION

We are required (as traders) to make a lot of research, study, analysis, test new strategies or improve our favorite ones. But the most important thing required is the ability to make the correct correlations between fundamental changes, technical study, and our perception about prices. This explain in few words why trading is not simple!

 

QUANTITATIVE EASING

It's an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy. A simple explanation of what happens with a QE is found in BOE's website where in a quick 'cartoon' they explain the meaning about this important topic.

Main QE program was introduced by the Federal Reserve in November 2008 after market's heavy crash in previous months. I decided to study the evolution of markets since that date, because there are some interesting facts happening.

 

DOW JONES INDUSTRIAL AVERAGE (DJIA)

Founded in 1896, this stock market index shows how 30 U.S. large publicly owned companies have traded during a standard session. The index is composed for example by stocks like American Express Co, JP Morgan Chase & Co, The Coca-Cola Co and many other 'well-known' names.

Looking at last 4 years we can easily see the effects after introducing the QE policy in both first and second programs (QE1 - QE2).

Chart 1 - DJIA30 Daily QE1

Chart 2 - DJIA30 Daily QE2

Chart 3 - DJIA30 Daily Today 

 

In 'Chart 3' is notable the strong 'sell-off' after QE2 ending in June 2011 when price came back near QE1 top levels. In the chart I drawn an important date in November 2011, when started the so called "Operation Twist", another unconventional program to help stimulate the economy by buying longer-term Treasuries (30y bonds) and simultaneously selling some of the shorter-term ones (less than 10y notes). In few words with this policy, the FED aims to lower long term yields (see AdrianWS article about bonds and yields) which would give more stimulus to the economy by making loans less expensive for those looking to buy homes, cars and other finance projects.

 

NASDAQ 100

Born in 1985, this index consists of U.S. based companies in many sectors like technology, telecommunication, biotechnology, media, services... so, for example we find Apple Inc., Google, Yahoo! Inc.

The NAS100 has a strong direct correlation with the DJIA30, as seen in this comparative chart below.


Chart 4 -NAS100 + DJIA30 comparative

 

FUNDAMENTALS & CHARTS

In recent press conferences, Ben Bernanke (FED Chairman) always had to answer the same questions about the beginning of a new QE program. What he officially said is that they "are ready to act with more asset purchases in case of need". So a question came to my mind: can we (small humans) understand at least 1 or 2 factors that could cause their need to act? To find a clear reason is not simple and not certainly in my abilities since I’m not an economist, but I noticed some interesting factors.

As shown in “Chart 5” by the red rectangle, DJIA30 price is very closed to the 2008 top levels and trend is still in upward direction.


Chart 5 - DJIA30 Weekly view


 

Looking at daily chart, things appears bit more clear:

Chart 6 - DJIA30 Daily view

Pattern is not suggesting more upside to come anytime soon, and for what I see there is a kind of weakening in this recent upward momentum coming from 12.000. I think it is clear enough that we are in a particularly difficult moment and seems like price can crash down anytime in incoming days/weeks, but in the same time is also possible a move towards the extreme 14.000 level to test supply strength.

Could this be 1 of the multiple reasons why the FED is “ready to act” if need? I think so! What I mean is that looking at “Charts 1-2-3” when they decided to increase their QE program, DJIA30 was in a deep low area, or was coming down quick from a supply level (Chart 2) and now there is nor one or the other scenario. It will be extremely important to follow this price moves in coming sessions, because we could find some clear signs of reversal down or continuation for new highs. A reversal for a downtrend could be the trigger for another QE program, the “so-much-advertised” QE3.

 

STOCK MARKETS

As explained and shown above, there is a direct correlation between DJIA30 and the NAS100 indices: they go up or down together. Some of NAS100’s components took my attention but one of them really amazed me.

Chart 7 - APPLE Inc.


I understand that Apple Inc. is maybe the best company in the world and the one who changed our habits with their "IPhone, Ipad, MacBook" etc.... but in the same time I wonder if here we could find the very first sign for a weakening. Price is very closed to $642 top. Worth to give an eye, in my opinion.

 

FOREX MARKETS

There are many correlations between stock indices and forex, but the main is the DJIA30 - AUD/USD.

Chart 8 - DJIA30 + AUD/USD

As seen in “Chart 8” since 15 march 2012 the correlation is almost perfect to the pip. Recently indeed, the AUD currency have been strong against all majors, recovering a lot of ground against the GB Pound and more against the Euro, Swiss Franc, and Japanese Yen. This is becoming very interesting: we have the DJIA30 near top levels together with AUD USD actually unable to trade steady above the 1,0600 line (which could suggest a move to 1,0800 - next main resistance area), the EUR USD still not showing strong technical reasons to buy aiming for 1.300 due to still not clear European decisions, and some of main stocks composing the NAS100 (which is more sensitive than the DJIA30) are at very extreme top levels or at least in supply area.

 

CONCLUSIONS

Based in these factors, I’m not going to expect further QE program by the Fed anytime soon, since they will first wait to see DJIA30 to test top price (14.000) or to show reaction at this 2nd approach at 13.300 which could become a double top in weekly/daily chart. In both cases, I’m going to expect more supply to come again in stock markets.

This, as strong direct correlation, will be seen also in AUD USD price charts where if we check the hourly TF we can already find reasons to look for a short position more than a long. I would not touch a lot the EUR/USD or the GBP/USD since we find a lot of confusion in recent sideway trends, and I would leave them for a while, until there are great opportunities in other pairs like AUD crosses, or some of CHF ones.

This article however, is to show some of the correlations between Stocks and Currencies markets, and is not intended to give any kind of suggestion in any trade and/or chart analysis. We all know that market changes for many reasons, so my ideas could become wrong 2 seconds after I click the “post” button here below. (lol I hope not).

Good luck with your trading.