The Market Reaction Matrix: an alternative way of looking at macroeconomic data

Whether or not you are doing thorough macroeconomic analysis in order to develop your strategic views, the Market Reaction Matrix is likely to be of benefit in your tactical maneuvering (trade determinations as well as position sizing).

We already know that the cause-effect relationships between technical analysis patterns, indicators, outcome of economic events, speeches by key people etc. and financial markets is not as straightforward as expected.

Furthermore, the problem with relying solely on technical indicators and patterns is often one of figuring out whether to treat the signal as consolidation-continuation or as reversal signal, and it is exactly here where the Market Reaction Matrix can be of help.

The key lies in observing the reaction of financial markets to the outcome of influencing events as the overall ‘cause’ in order to determine the ‘effect’ – that is, the probable direction of markets – instead of observing the outcome of events as the sole ‘cause’.

For example, if the USD is consistently bid higher on clusters of positive events relating to the economy and suddenly the USD fails to be bid higher on continuing outcomes of positive events, the situation is very different from the USD failing to be bid higher on a series of negative events relating to the economy. Technically however the charts will indicate the same – some kind of price consolidation.

The former scenario has far more merit in indicating a permanent trend reversal or turning point, whereas the latter has a higher chance of resulting only in a temporary reversal i.e. the continuation of the current trend may be resumed (more here).

Additionally, while you might not be actively trading other markets, your trading may be significantly improved by studying the reactions of those markets, most notably the groups, currencies, bonds, stocks and commodities (more here).