The Intermarket Analysis is a type of technical analysis that examines the relationships between different asset classes.
For example, a trader could analyze the Bond Market to decide on the Stock Market.
The Intermarket Analysis helps to achieve a better global understanding of financial markets.
Intermarket Analysis and MacroEconomy
Macroeconomics experts analyze data such as GDP to make decisions.
Technical analysts instead examine all the assets to have an expansive view of the market through Intermarket analysis.
John Murphy made this kind of approach famous in the 90s. Murphy wrote that there were four types of correlations:
- Inverse correlation between commodities and bonds
- A positive correlation between stocks and commodities
- Inverse correlation between dollar and commodities
Why do these correlations exist?
Commodities influence bond prices through rising inflationary pressure.
For example, if commodities start to rise, producers will pay more for raw materials. This will be reflected in consumer prices that will tend to increase, rising inflation.
If inflation goes up, central banks will have to raise interest rates. Central banks generally target inflation of no more than 2%.
When interest rates go up, bonds fall.
These correlations have changed over the years. This is due to the intervention of the central banks and the sharp reductions in interest rates.
A decline generally follows an increase in the US dollar in commodity prices. In particular, this correlation exists between the dollar and gold.
Intermarket analysis can also exist in the lowest time frames and can also be used for intraday operations.
It is a sort of arbitrage between asset classes. When two assets are correlated, they do not move simultaneously. Generally, one of the assets tends to move first.
It is, therefore, possible to build a trading system that observes an asset and then operate on the related one.