Friday, January 22, 2010

Viewing Markets Through the Telescope

If I were running a training program at a trading firm, a nice quiz question I would pose to developing traders would be the following:

We see that the euro (top chart; FXE) and stock market in China (bottom chart; FXI) are making multimonth lows. Why are the charts so similar?

And I might pose some follow-up questions:

What are the implications of those similar charts for interest rates and credit markets?

What are the implications for U.S. stocks? For U.S. stocks vs. European and Asian markets? For the yen?

What would you be tracking going forward to handicap the odds that the bull market in stocks will continue vs. the odds that we've made a longer-term top?

It's important to view markets through both microscopes--the short-term action, including volume, sentiment, and order flow--and through telescopes, the big themes that shape trends and reversals.

The above are telescope questions; later I'll pose a few through the microscope. Meanwhile, the posts below will provide some clues as to answers to my quiz.