Correlation Analysis compares a stock against either an indicator or another stock and illustrates how similar/dissimilar they are to one another.

You can use correlation analysis in two basic ways: to determine the predictive ability of an indicator or to determine the correlation between two securities.

When comparing the correlation between an indicator and a security's price, a high positive coefficient (more then +0.70) tells you that a change in the indicator will usually predict a change in the security's price. A high negative correlation (less than -0.70) tells you that when the indicator changes, the security's price will usually move in the opposite direction. A low (close to or equal to zero) coefficient indicates that the relationship between the security's price and the indicator is not significant.

Correlation analysis is also valuable in gauging the relationship between two securities. Often, one security's price "leads" or predicts the price of another security. For example, the correlation coefficient of gold versus the dollar shows a strong negative relationship, an increase in the dollar usually predicts a decrease in the price of gold.