Why Euro Traders Should Watch the S&P

07/12/2012 6:00 am EST

Focus: FOREX

Marc Principato

Director, SMB Forex training Program

Marc Principato, contributor to SMB Training, explains why the correlation between the S&P and euro offers great trading opportunities.

Forex traders may not always see the correlation between equities and the euro, but it’s an important one and should be watched closely. The relationship is typically: S&P goes higher, EUR goes higher. There are fundamental reasons for this, but that is a subject for another MoneyShow.com article.

What I want to do here is highlight a particular condition that appeared in the S&P and how it affected the EUR/USD currency pair.

Notice the ES (S&P e-mini futures) attempted to make a new high around 9:30 a.m. ET. EUR/USD clearly had no new high in sight...only a lower high. This usually implies weakness. At that point, the S&P just needed to show confirmed selling.

chart
Click to Enlarge

As the S&P started to pull back off its high (showing a long tail), the condition met enough criteria to make selling the EUR/USD an attractive choice in terms of the associated risk.

If a scalper were to go short, the risk is low because a very tight stop (no more than six pips) can be established here, given the weak conditions. The reward of at least ten pips would be a reasonable expectation considering the EUR/USD just pushed up significantly from its low. As you can see, the pair went much lower once the S&P started to sell off.

Is a ten-pip target too small? It depends on your style and risk tolerance. As a scalper, I consider ten pips a good trade.

So the lesson to be learned here is one of relative strength. S&P new high, EUR/USD no new high. Weak. Look to sell at the first sign of selling. That is the mental framework you must have in order to enter a trade like this.

Marc Principato is a contributor to the SMB Training site.

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