Technical and Fundamental Global Links

NEW YORK (TheStreet.com) -- There is not a huge difference between a fundamental trader and a pure chart technician: both have refined their crafts and both are subject to the ebbs and flows of market sentiment and cycles. Both will also very likely have a much better understanding of the other aspect of the market that they do not use than they would ever admit.

Some traders combine the two; they use the fundamental links that connect each global market to confirm the technical setups that are waiting for a near-term instigator. Not all economics follow through as price action and no chart setup comes with a guarantee. Both will fail to follow through as expected at times and both will do so to the same degree. Both are driven by the same thing: sentiment and reaction to what is happening in those forex-related markets.

The volatility of the lower time-frame chart comes from the ebbs and flows from the wheels of global commerce turning. Understanding that a move that actually holds is likely in reaction to a news release or the reversal or breakout of S&P futures trade is an important aspect of any market trader. Keeping an eye on the global market fundamentals and price action in interlinked markets is key to taming low time-frame volatility.

Is there a negative in knowing that Treasury yields help move the Swiss franc? Or that the euro had a 90% correlation to oil in 2008 and a 90% correlation to S&P futures trade in the summer of 2009? Or that the yen did not follow the S&P futures from March 17, 2008 until December? It is all tradable fundamental information that can only assist in understanding and learning the nuances of commodity trading.

Secondary confirmation from an oil chart that the euro may easily move or a Treasury chart that a swissy setup is following in line is using fundamental market knowledge (the links between markets) to confirm the strength of the technical setups. It may not make or break the decision to trade, but can sometimes help in the amount of exposure to take.

The fundamentalist will understand the likely future consequences of economic decisions (we do not however refer to fundamentalists as the news junkies who are looking for a media-driven angle to play or for a surge in momentum to double their account) while the technician will be plotting trend and price points as the likely consequence of those same economics. One looks for the direction and one looks for the price points to be hit once that direction is in place.

Fundamentals drive direction and trend, technical's reveal support and resistance areas that will likely get hit along the way. Take away the talking heads, take away the biased opinion, take away the sound bites, take away the blaring headlines and we are left with two things: direction (fundamentals) and price points (technicals).

Charts are the reflection of market sentiment and as they also house the price points to be hit once direction has been set, they are obviously critical to a trader. You will be hard-pressed to trade any market without a chart. Longevity, however, comes with an understanding of why the chart patterns sometimes fail and why they follow-through better sometimes than was ever initially apparent.

In refining money management, the art of fundamental analysis from another markets is important because the spider's web effect of a pull-in-one market creates a converse push in another interlinked market that cannot be ignored in the era of automated contingency trading.

It makes no difference as to whether we think the U.S. is in trouble or that the European Central Bank may not move rates; all that really matters is whether the chart setup will follow-through in reaction or not. Either way, if we know what the driver of our traded asset class is, we can add that to the law of probability for the next time that same setup occurs and adjust our exposure accordingly when a technical setup is backed by fundamentals.

As traders we work with the law of probability in understanding that previous reactions to the same situation will produce the same results. As most pro traders will testify, we have to be prepared to take the opposite trade at times when fundamentals do not back the technical near-term view.

That law of probability is not always as probable as one would expect, but it does at least allow for a failing trade that has a mixed fundamental and technical view to be taken with a limited amount of exposure -- if any at all.

-- written by the LFB staff in Scottsdale, Ariz.