Picture of a cornfield. The corn market traditionally has had a relationship with live cattle futures

Relationships Between Markets

The Influential Relationships Between Commodity Futures Markets

No doubt you’ve noticed that many of the commodities markets are similar and move in a similar fashion. This exercise is only to make you aware of the possible relationships between markets. Occasionally you can get clues as to how related markets will behave based on what is happening in another market.

*This is an exercise only! NEVER TRADE ONE MARKET BASED SOLELY ON WHAT IS HAPPENING IN ANOTHER MARKET!

From the list below, choose the markets which are related and tell me in what way. For example: Which market is the leader and which is the follower? Is there even a leader or follower? Do they have a direct or indirect relationship?
[Hint: some markets might affect more than one other market]

Live Cattle
Gold
Corn
Soybeans
Feeder Cattle
US Dollar Index
Sugar
Crude Oil
Pork Bellies
Soybean Oil
British Pound
Silver
Cocoa
Live Hogs
Heating Oil
Canadian Dollar
Wheat

Answer:

Live Cattle vs Corn – have an inverse relationship. When corn prices go up, cattle prices tend to come down. Note: this relationship is strongest in “normal” years. Since the discovery of Mad Cow in North America, the cattle market has been anything but normal and this relationship between markets has been almost non-existent.

Gold vs Silver – have a direct relationship. In most cases gold will drive silver’s prices. Silver is known as the “poor man’s gold” and will usually follow gold’s lead.

Feeder Cattle vs Live Cattle – have a direct relationship. Feeder Cattle prices will sometimes move slightly in advance of Live Cattle prices so watching Feeders might give you a clue to what could happen to Live Cattle. This is how the saying “feeders are leaders” came about. And if you’ve every traded Feeder Cattle you might also be familiar with the other expression “feeders are bleeders”.

Live Hogs vs Pork Bellies – have a direct relationship. In most cases Hogs will lead Pork Bellies and like Feeder Cattle and Live Cattle can give you a clue as to what to expect in the other market, but who wants to trade Bellies anyway?

Cocoa vs Sugar – a very loose direct relationship. While there is nothing really connecting these two markets they do nevertheless have a tendency to move together, sometimes very closely.

Crude Oil vs Heating Oil – have a direct relationship. Since Heating Oil, and many of the other energy markets, are derivatives of crude oil their prices normally move together. Neither market leads; however sometimes crude will give better support and resistance levels than heating oil will.

Wheat vs Soybeans vs Corn – have a direct relationship. The three primary commodities of the grain complex. Often a strong price direction in one market will affect the direction of the other two. While there is nothing official, I have found that many times wheat will be the first market to react and the other two will follow.

US Dollar Index vs. British Pound, Canadian Dollar, Gold, and Silver – have an inverse relationship. Since world currencies are based on the US Dollar and strong dollar will usually have an inverse affect on other nations’ currencies. Likewise, gold and silver are traditional “safe” investments when the US Dollar stumbles. No market leads.

US Dollar vs. Wheat, Corn, Soybeans, Crude, and Heating Oil – have an inverse relationship. Similar to the other category, when the US Dollar is strong it makes export crops like wheat, corn, soybeans (and cotton) expensive on the world scale. As a result there is downward price pressure on these markets. In a similar fashion when the US Dollar is strong, import commodities like crude oil become inexpensive, relatively speaking, due to the increased purchasing power of the US currency.

 


First published by Erich Senft, CTA on the support and resistance website in Homework Assignments, in 2004

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