To bring out a new idea concerning technical analysis, new idea compared to what I have talked about so far, is intermarket technical analysis. What this really means is that ideally, all different markets should be examined together, not separately. Stocks, options, forex, bonds, in some ways they are all related and viewing them together as one might often give better idea what’s happening or what’s going to happen, than just looking at one market.
For example, John Murphy says that bonds tell us the way interest rates are heading (important for stock prices), commodity prices show us where the inflation rate is heading (influences bond prices and interest rates), forex (or to be more exact, the price of US dollar) sets the inflationary environment (which infuences which way commodities trend). And overseas markets show in which kind of environment the US market is part of.
Intermarket analysis should be divided into those four mentioned sectors – stocks, bonds, foreign exchange and commodities. And all those charts should be examined together. These charts are all related. For example US dollar prices are very often exactly the opposite to commodity (CRB Index) price movements. Strong dollar and firm bonds market means often bullish stock market. And strong dollar keeps commodity market in downtrend.
To get a basic understanding of the intermarket analysis, keep in mind that different markets don’t move in isolation, they are related to each other; intermarket analysis count on external rather than internal data; and technical analysis is our main tool. Also keep in mind that intermarket analysis is meant for secondary confirmation instead of primary. This analysis has mainly supportive importance, it gives good background information. Primary analysis should still be done on the main market you’re trading on – whether it’s currency trading, stocks or anything else.
In case where intermarket analysis and the specific market analysis gives some weird results, eg. two markets seem to be both in a bullish trend, markets that usually work in the opposite directions, then you can expect at least one of them to change trend and this is already a very important information to you. Even though at that point you might not know which one of those markets, thus further analysis need to be done.
Good thing about techcnical analysis is that you might often not know the specific market too well, but you can still work with the same technical analysis methods. If you were mainly concentrating on fundamental analysis, you would first need to learn the workings of each market individually, while with technical analysis, while individual knowledge of each market is always appreciated, you can already understand the basics of how to analyse the market using the tools available in technical analysis. Now this was a long sentence, don’t mind it, just try to get the main point – Intermarket analysis is a lot easier with technical analysis than with fundamental analysis.
The emphasis of intermarket analysis is on futures market as they cover every market sector.