I talk a lot about the intermarket relationship between the S&P 500 Index futures, and the EUR/USD forex pair.

The relationship is typically, S&P goes higher, EUR goes higher. There are fundamental reasons for this that I am not going to go into here.
What I want to do here is highlight a particular condition that appeared in the S&P and how it affected the EUR/USD currency pair.

Notice the ES (S&P e-mini futures) attempted to make a new high around 9:30 AM ET.  EUR/USD clearly had no new high in sight, only a lower high. This usually implies weakness. At that point, the S&P just needed to show confirmed selling.

As the S&P started to pull back off its high (showing a long tail) the condition met enough criteria to make selling the EUR/USD an attractive choice in terms of the associated risk.

If a scalper were to go short, the risk is low because a very tight stop (no more than 6 pips) can be established here given the weak conditions. The reward of at least 10 pips would be a reasonable expectation considering the EUR/USD just pushed up significantly from its low.

As you can see, the pair went much lower once the S&P started to sell off.  Is a 10 pip target too small? It depends on your style and risk tolerance. As a scalper, I consider 10 pips a good trade.

So the lesson to be learned here is one of relative strength. S&P new high, EUR/USD no new high. Weak. Look to sell at the first sign of selling. That is the mental framework you must have in order to enter a trade like this.

Marc Principato