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Monday, January 28, 2013

Interesting Analog

Written January 28, 2013 by Michael Harris - Price Action Lab Blog.

After the March 2009 stock market low, a new pattern of correlation between S&P 500 and NASDAQ-100 emerged. The basic features of this pattern are a higher correlation between the two indices during up moves than before the financial crisis and a drop of the correlation to the highs seen before the March 2009 lows just before corrections occur. Currently, the correlation is at levels reached before the corrections of 2010 and 2011.
This pattern is interesting because it shows how the 252-day rolling correlation between S&P 500 and NASDAQ-100 increased after the March 2009 low and stayed above the highs realized since the mid 1980s . Before the 2010 and 2011 corrections the correlation reverted towards +0.90. During the uptrends in-between the corrections the correlation stayed close to +0.95:
SPX_NDX_CORR_20130125
It could be that this is a random pattern and it does not indicate a coming correction for 2013. Obviously, investment decisions should never be based on only one pattern but on a collection of patterns that together point to a very high probability trade with an expected gain much higher than the expected loss. 

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