Forex Technical Analysis PCI 2014-07-11

Good afternoon, dear investors. Today we consider the example of unbalanced spread trading, a trading method effectively used within Personal Composite Instruments - PCI Technology. The basis of this method is the expression of the underlying asset in units of the quoted one, provided that both assets have a negative relation: the underlying asset price growth causes the price drop of the quoted asset and vice versa.

It means that a slight price deviation of any PCI part results in further movement in the given direction: the synthetic instrument is trend predisposed. To search for "reverse spread" we use correlation coefficient indicator (r) and the criterion: r< -50% for that coefficient. The correlation assumes the values ranging from -100% to 100%. Negative values indicate reverse statistical relationship between the two assets. Before the correlation analysis is being consucted, it is recommended to suggest the fundamental hypothesis of competing assets, or assets - substitutes.

Today as such assets we consider the frozen beef and soybean commodity futures: #C-FCATTLE, #C-SOYB. It is quite natural to assume that soy is a cheap filler and a meat product substitute, and under certain conditions we can observe the demand substitution effect. Most apparently this effect appears at the vegetarian lifestyle macro trend expansion, or a drop in personal income. An opposite situation is possible to happen: the meat consumption growth in Asian countries (European influence) eventually leads to a drop in soy demand and increased meat demand, including beef. One of these trends immediately results in #C-FCATTLE and #C-SOYB reverse relation boost. 

So let us verify our hypothesis. For this purpose we include the correlation indicator between #C-FCATTLE and #C-SOYB in MetaTrader4. The indicator is attached to the #C-FCATTLE daily chart. We will use the statistical analysis volume of 13 days for all the indicators, following the consistency principle of analysis methods. At the moment the correlation value corresponds to 80%. Moreover, the trend is fixed to a further correlation decline and increased inverse relations between the commodity futures. The spread instrument, built on the basis of the given asset pair, has a high probability of the trend movement and unstable flat.

We build the spread synthetic instrument in NetTradeX trading platform, using the GeWorko Method. The PCI price is defined as the expression of #C-FCATTLE value in units of #C-SOYB commodity futures. The instrument trading is carried out as a standard Forex tool. We can see that at the moment there is a correction observed within the daily uptrend channel. The large-scale trend remains bullish. It is confirmed by the moving average, which is close to the support line, and the MACD indicator behavior. The RSI signal (13), which broke the trendline, is of some concerns. But we know that the oscillators are quickly overloaded during the trend impulses and give incorrect signals. However, in order to feel more confident, it is recommended to wait for a signal reversal upwards. Pending buy order can be placed above the fractal resistance at 1.15264. The price crosses the Parabolic signal and we get the last necessary trend confirmation at the order execution. Profit and risk are limited at approximately the same distance from the price: 1.31411 and 0.97373. When crossing Stop Loss level, aggressive traders can immediately open a short position, taking profits in the area of the weekly support at 0.80477.

We draw your attention to the fact that since the reverse spread beginning (April 30) #C-FCATTLE futures price has increased by 15% while the PCI price of #C-FCATTLE/#C-SOYB rose by 57%. The reverse spread use multiplied 4 times the yield growth. At the same time we are safe from systematic risks such as falling food demand. We are interested only in the relative movement. The synthetic instrument allows hedging the order, while providing the instrument persistence, i.e. its trend behavior.