Correlation is a very interesting phenomenon in different areas of life, and more particularly in finance. This phenomenon is characterized by a coefficient which varies from + 1 through 0 to – 1.

When this coefficient is close to 1, we say that the two markets are positively correlated, and if it is close to -1, we say that they are negatively correlated.

This phenomenon is mainly due to several similarities between the two markets, in particular when they work in the same sector, they contain the same associates.

However, sometimes this correlation breaks, we say that we have a divergence, and during  this situation we must react rapidly to prepare for a new strong convergence, this method is called statistical arbitrage or futures spread.

Investors classified Statistical arbitrage into three categories, commodity product spreads, intramarket spread (calenderspread) and intermarket spread.

This strategy concerns especially intermarket spread, it applies to the largest financial index, the S& P500  and the NASDAQ.

Using an indicator called  SpreadDistance developed by our team, we can detect the divergence in order to enter Long with the NQ and Short with ES, and vice versa.