Market Sensitivity and Commodity Chains – How to Check

Market sensitivity is often discovered through commodity chains. In the MTM Daily Edge sessions, we examine many markets for patterns that typically precede the start of trends, as well as the setups that often occur when a trend is near exhaustion. Pattern recognition and technical analysis are a big part of many traders’ decisions. The relationships among sectors, such as treasuries, equities, foreign exchange, precious metals and energies are revealed during critical economic events.

Abrupt Moves Reveal Relationships

Extreme moves frequently reveal correlations between market sectors. Under normal conditions the equity sector falls when there is a rise in inflationary expectations and employment is stagnant. Subsequently, traditional havens such as interest rate and gold futures and their ETFs respond with rallies. Many portfolios are built around this concept. Treasuries and precious metals tend to be havens when stocks are in trouble. The dollar frequently has an inverse relationship with gold. A move in one sector often coincides with another whether it be directly or conversely.

Identify Connections

Gold has been a hedge against the dollar for quite some time. A strong dollar equals weak gold. That relationship still exists most of the time. The point is that a move in one financial asset often has a trickle-down effect. Interest rates are connected to stocks, and a move in stocks may affect precious metals, which may alter exchange rates. And a change in currency may have an impact on commodity prices such as grains, coffee and sugar. It is a complicated network that occasionally gives a trader more confidence when creating strategies. For example, a subtle move higher in gold could be the tipoff to sell the dollar.

Technical Treasures

Professional traders incorporate fundamental data and technical analysis to create strategy. Most of us do not have the access to research and development that institutional traders do. However, we can learn to be fundamentally proficient using technics.

Charts Reveal Relationships

Pay special attention to price spikes when event risk is high. The Federal Reserve is in control of monetary policy. Their mandate is to promote full employment and mitigate price pressure (inflation). Thus, the price action immediately following news on these two fronts will often reveal sector sensitivity. Check your calendar for reports that include employment and inflation numbers. Recently, these details impact prices more than housing, sales and sentiment reports.

Technical analysis is a treasure if you understand it. It is a guide that reveals history and illustrates similarities and differences between financial assets.

Fundamentals First

Fundamental data are the main source for market movement. However, traders must interpret price action and make trades using technicals between fundamental events. The best way to understand the relationship between sectors is to monitor the reactions after a surprise or unannounced event. The movement in one market may be the catalyst for the movement in many.

Traders are analysts, and the good ones use every resource available to gain an edge. I recommend starting each day by reviewing which reports will be released and which markets those reports are likely to affect. Next, try pinpointing support and resistance levels depending on whether the reports are bullish, bearish or neutral. By doing so you will be prepared to react almost instinctively depending on the situation.

Commodity Chain Check

I also check the “commodity chain,” which is the connection or correlation between various sectors. The recent connection chains are as follows. Interest rate futures, gold, euro and Japanese yen tend to move in sync, while equities and energies tend to move together and opposite the interest rate chain.

When you are prepping for the day, be sure to check the fundamentals, technics and chains. A prepared trader is more likely to make great decisions.

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.