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2020issue C0552-56

Constructing a correlation-to-line trend filter

A correlation-to-line trend filter is built by correlating recent closes with a straight-line ideal trend over a chosen lookback. The construction is an explicit, inspectable baseline for reading trend versus range.

  • The indicator is constructed by correlating a security's recent closes with a straight-line ideal trend over a chosen lookback.
  • One implementation computes Pearson-style sums of closes and of a descending time index, then divides the covariance numerator by a product of standard-deviation terms when the denominator is nonzero.
  • An equivalent construction is a linear time regression of closes over a 20-bar window, and charts commonly overlay 10-, 20-, and 40-bar versions together.
  • The same reading can be used as a regime filter: names that persist in trend may favor following positive readings, while range-bound names may call for fading deeply negative readings instead.
Entries in this reading3 entries
Current trackCorrelation analysis52 readingsLinear regression112 readingsTrend filter137 readings

What the series measures

The indicator is constructed by correlating a security's recent closes with a straight-line ideal trend over a chosen lookback. Correlation analysis supplies that comparison of closes with the line. Linear regression of closes on time is an equivalent construction. The resulting series is then read as a trend filter.

How the calculation is assembled

One implementation computes Pearson-style sums of closes and of a descending time index, then divides the covariance numerator by a product of standard-deviation terms when the denominator is nonzero.

A compact formula version correlates a cumulative time index with closing prices over a user-chosen period that defaults to 20 bars and can range from 5 to 200.

Default inputs and overlaid windows

A 20-bar lookback and a 0.5 trigger level are used as default inputs for the plotted indicator in one platform implementation.

An equivalent construction is a linear time regression of closes over a 20-bar window, and charts commonly overlay 10-, 20-, and 40-bar versions together.

Historical strategy and regime uses

A paired-horizon strategy example uses a 20-bar fast correlation and a 40-bar slow correlation, entering when the fast series crosses above 0.5 and exiting when the slow series crosses below 0.

A long-only demonstration enters at market when a 20-day correlation trend series crosses above zero and exits when that series crosses back below zero.

The same reading can be used as a regime filter: names that persist in trend may favor following positive readings, while range-bound names may call for fading deeply negative readings instead.

Limits as a standalone rule

On one tested index series, a 20-bar correlation-trend reading showed some association with later price change, but that association was described as too weak to use as a standalone trade rule because price-difference variability far exceeded the extremes of the difference itself.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
36 of 37 in the Correlation analysis track
202028-33 pp.Next on Correlation analysisBitcoin correlation regimes across equities and goldOn daily prices from late April 2013 through March 2020, bitcoin’s Pearson correlation with the S&P 500 was 0.85, while gold and the dollar-yuan pair each printed 0.52.
All readings on this track · 37 readings
  1. 1988Constructing a lead-aware correlation coefficient
  2. 1989A precious-metal price as a changing intermarket equation
  3. 1990Two clocks for copper: a factor regime, a regression baseline, and leftover moving-average timing
  4. 1990Earnings yield, rate correlation and regression for equity value
  5. 1991Name the window, then combine leaders
  6. 1991Constructing a two-market linear correlation check
  7. 1991Constructing a commodity-bond correlation regime filter
  8. 1992Building intermarket context with linear correlation
  9. 1993Inverse-scale overlays as a gold-equity regime filter
  10. 1994Constructing seasonal slots from windows, analog years, and implied volatility
  11. 1995Pin one reference close and roll companion correlations as an overlay
  12. 1995Rolling correlation windows for shifting intermarket regimes
  13. 1998Gold as a cross-market regime barometer
  14. 1999The gold-bond inverse is a regime, not a cause
  15. 1999A nested lag test of gold leading bond yields
  16. 1999Constructing spreads from stock and intermarket correlation
  17. 2000Evaluating headline versus food-and-energy-excluded CPI as bond-yield context
  18. 2005A late EUR/USD fifth wave tested by the Bund-Treasury gap
  19. 2006Intermarket dislocation as context for short-horizon momentum
  20. 2008Map ordinary 12-month outcomes before stacking valuation, rates, and seasonality
  21. 2008A clean-energy theme inside the oil-and-energy regime
  22. 2014Quantitative-easing overlays as fragile belief regimes
  23. 2015Three intermarket checks from the late-2014 crude decline
  24. 2015Basket construction via rank, correlation, and locked rules
  25. 2015Construct a CAD-oil pair from percent-of-range Bollinger maps
  26. 2015CAD/USD and crude: first the correlation, then the band gap
  27. 2017Correlation regime versus moving-average crossover for S&P 500 exposure
  28. 2017Updating intermarket systems after correlation shifts
  29. 2017Constructing a correlation-divergence regime filter for yen and Nikkei context
  30. 2018Clustered negative troughs in an energy-index pairwise correlation
  31. 2018Filter pairwise-correlation before reading an intermarket regime
  32. 2018Moving-average supports in the March 2018 correlation shock
  33. 2020Bond spreads as an equity regime lens
  34. 2020Crash-protection folklore as a correlation regime question
  35. 2020Constructing a bounded correlation-trend-filter
  36. 2020Constructing a correlation-to-line trend filter
  37. 2020Bitcoin correlation regimes across equities and gold
By fieldIndicators and filters682 readingsBy year202085 readings
All 52 readings tagged Correlation analysis
Also on Correlation analysis5 readings
2020Constructing a bounded correlation-trend-filter1989A precious-metal price as a changing intermarket equation1990Two clocks for copper: a factor regime, a regression baseline, and leftover moving-average timing1990Earnings yield, rate correlation and regression for equity value1991Constructing a two-market linear correlation check