Education / Intermarket Analysis

Economies influence one another

Nowdays every market player should realize that what happens on one market often has an effect on what happens in another. No market operates in a vacuum. In modern global, 24-hour, electronically traded exchanges it takes only moments for a market-moving event to influence prices in a number of interconnected markets around the world.

For many years there has been a tendency to focus on traditional single-market approach. In other words traders rely on technical analysis focusing on price reflection on a chart, considering historical data in attempt to gauge how a particular market will act in future. With the course of time it becomes necessary to add a third dimension – to detect the impact that prices in other markets have on the price of the market being traded. Besides the cause-and-effect relationships that exist among the stock, bond, currency, and commodity markets are getting more interference.

So what is intermarket analysis? In the intuitive level it starts with the basic belief that as money flows from one economic area to another. It is so based on the rational decisions for the entire market place. intermarket analysis describes the impact that different global markets have upon one another. This topic has been discussed in numerous trading books and articles, and says, in a nutshell, that all markets and asset classes are interconnected. Although these relationships vary from market to market and change over time, they cannot be ignored.

It's no longer enough just to observe where related markets are going. Now new quantitative methods of analysis, capable of finding hidden patterns and relationships in related market data, are necessary to identify and so profit from lucrative trading opportunities.

Major changes in commodity prices affect the bond markets of different countries in different ways, depending upon their economic structure. The price of copper tends to be followed by demand for semiconductors, while bond prices move in the opposite direction to the energy complex, and at the same time followed by directional changes in commodity prices.

Why is it so? How long does it take markets to react? What sectors are effected first? When opportunities dry up in one sector, where does money should be directed to take advantages of the next stage of global market development? That is what intermarket analysis can tell you if you learn what to look for. It is a great strain and a continuing challenge, but always worth the effort.

And a well-known example of gold market, which not only acts in relation to dollar and bond prices, but also within the entire commodity complex. Its role as a store of value means that it is sensitive to interest rate trends while its position as a pure commodity ties it to raw materials price trends. It is pushed and pulled by movements in the dollar and other articles of financial market.

Intermarket analysis can be used in all markets and in all part of the world. It enriches technical analysis by means of studying external factors and enabling understanding deeply the nature of market forces and in such a way to get an overwhelming notion about functioning of global market mechanisms. So intermarketanalysis doesn’t replace other technical tools of processing market data, but proposes an additional dimension and objectivity technical analysis.