Though the name of this setup may sound complicated, it actually employs a simple and familiar concept: the fundamental influence of one market upon another.
In prior setups we have used direction in Treasury Bond futures (ZB) as a filter for an indication of the likely strength and longevity of a move in the stock indices. What we will now do is to quantify the relationship between a primary market – the one we will trade, and a secondary market that influences it, and use this as the basis of a trading signal.
Here’s how:
The setup below combines differentials in T-Bonds and the S&P index with very basic swing theory to give us a strategy based on both technical and fundamental factors, though this same inter-market differential indicator, in the appropriate timeframe, could be meaningfully combined with many of the other technical setups we’ve discussed. The strategy below trades the e-Min S&P500 futures using this differential.
Parameters for buys (rules are reversed for sells).
If you would prefer trades of a shorter duration, then the indicator works equally well on hourly and thirty-minute charts, though you should still look for confirmation from the price chart in the form of a swing.
You can make use of this concept wherever you know that a fundamental relationship exist between two markets, with one influencing the other. Gold (GC) tends to influence the value of bonds, for example. Some commodities will also influence the price of particular stocks – both those that produce the commodities and those that consume them.
You might also like to consider methods for trailing your stop-loss, at least up to break-even, once you get into profitable trades with this system.
In prior setups we have used direction in Treasury Bond futures (ZB) as a filter for an indication of the likely strength and longevity of a move in the stock indices. What we will now do is to quantify the relationship between a primary market – the one we will trade, and a secondary market that influences it, and use this as the basis of a trading signal.
Here’s how:
- Divide the value of the primary market by that of the secondary market to give the differential, and then multiply by 100 to give an index.
- Create a MACD oscillator using a 5 and a 20 period EMA of the differential. We’re using exponential averages here to minimise lag.
- Crossovers of the faster and slower moving averages of the differential will provide the basis for our entries and exits.
The setup below combines differentials in T-Bonds and the S&P index with very basic swing theory to give us a strategy based on both technical and fundamental factors, though this same inter-market differential indicator, in the appropriate timeframe, could be meaningfully combined with many of the other technical setups we’ve discussed. The strategy below trades the e-Min S&P500 futures using this differential.
Parameters for buys (rules are reversed for sells).
- Plot the inter-market differential indicator (for bonds and the S&P500) under a daily bar chart of the index.
- Wait for a daily close which causes the indicator to cross above its zero line and give a positive reading. Place a buy order with your futures broker at the highs of this day.
- Your stop-loss should be placed at the lows of this day. Your buy order can be left in place until it is activated, unless the inter-market differential indicator gives a negative reading, in which case it should be cancelled.
- Your exit is a negative crossing in the inert-market differential indicator, causing it to close back below its signal line.
If you would prefer trades of a shorter duration, then the indicator works equally well on hourly and thirty-minute charts, though you should still look for confirmation from the price chart in the form of a swing.
You can make use of this concept wherever you know that a fundamental relationship exist between two markets, with one influencing the other. Gold (GC) tends to influence the value of bonds, for example. Some commodities will also influence the price of particular stocks – both those that produce the commodities and those that consume them.
You might also like to consider methods for trailing your stop-loss, at least up to break-even, once you get into profitable trades with this system.