Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Study on ES-Mini Futures (US Market) and WTIC Crude Correlation Cycles

1 min read

We know that S&P 500 Index Futures (ES-Mini) and Crude Oil is correlated most of the time at lower timeframes. But recently the correlation seems to be missing between the two, where the ES Mini started rallying and the oil started dropping below sub 66 levels that make me write about the correlation relationship between the two.

Correlation, when applied to time series datasets, is often not a static number. Especially financial markets, correlation occurs in cycles around different trading instruments and oscillates between highly correlated and no correlation. Correlation is a lagging indicator which explains how two instruments are correlated in the past and will not explain whether the same will continue in the future or not.

If you would like to predict using correlation then it’s better to bifurcate the correlation cycle into two types.
1)Positive Correlated Phase (Correlation Co-efficient in increasing mode)
2)Negative Correlated Phase (Correlation Co-efficient in decreasing mode)

To understand this correlation behavior let use both shorter timeframe and longer timeframe to understand this behavior.

Short-Term Correlation Cycle

Here is the 30minute chart where WTIC Crude is plotted with scale on the right and ES-Mini as orange lines with scales on the left and a 100-period correlation coefficient is computed between the two instruments and sub-plotted below the price charts. It’s been visually observed from the charts that as long as the Correlation Co-efficient in increasing mode tight correlation continues in the very short term. Greater the positive slope very tighter the correlation between the two asset class.

And recent times Correlation Co-efficient is in decreasing mode with a strong negative slope which clearly informs that both the asset classes are in negatively correlated phase and soon this could change if the cycles are about to turn to positively correlated phase.

Long-Term Correlation Cycle

When comes to long-term correlation cycle, daily timeframe is used with 100-period correlation coefficient to measure medium-term outlooks between crude and ES-Mini to understand are they fairly correlated or not.

From the charts, more positively correlated cycle continued during 2009-2013 period where both the asset class remained correlated most of the time as the correlation coefficient also spends more time above zero level. Post that prolonged & positively correlated phase started the sine-wave type correlation where the positive correlation cycle is followed by negatively correlated cycle and it kept on repeating very often from on.

Recent data points show that currently, both the asset classes are undergoing a negatively correlated cycle since the start of the year 2018 where crude oil went up overall, however, stock index futures declined overall showing a negative correlation in the higher timeframe. The recent readings seem to resume again with positive cycle means in the medium term again the correlation could resume to positively correlated cycle mode.

How does it helps a trader?

You cannot use these cycle information to take trade decisions all the time. However, when we are in a positively correlated phase we can higher weight-age to crude oil price action movements to trade ES-Mini in the same direction and during negatively correlated phase avoid watching crude oil price movements as it either going to be more of noise(random movements) or both the instruments likely to move in opposite direction.

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Ultimate Guide to Momentum Trading

This a brief video guide for the momentum traders which explains right from what is momentum trading ,how momentum trading is related to diffusion...
Rajandran R
18 sec read

What We Can Learn from the Sideways Market –…

What is more required during a sideways market is frequent evaluation of your strategy, keeping your emotional balance in check, and not getting into...
Rajandran R
1 min read

What We Can Learn from the Sideways Market –…

The sideways market occurs when markets are not dominated by the large players and instead traders attempt to dominate the market and keeps the...
Rajandran R
57 sec read

Leave a Reply

Get Notifications, Alerts on Market Updates, Trading Tools, Automation & More