What is Intermarket Analysis?
Intermarket analysis involves the review of the four financial markets: currencies, commodities, bonds, and stocks. These four markets react and respond to each other throughout the trading day. It is this Intermarket response that gives predictive power to this type of analysis.
There are very specific “rules” about how these markets interrelate. One such rule is that the US dollar trends in the opposite direction of commodities. There are many other rules that intermarket traders have developed to provide insight on how certain markets will react. Understanding the Intermarket relationships among the four market groups is critical to predicting with any degree of accuracy how market prices will be affected.
Basic Intermarket Principles
- All markets are connected, both domestically and globally.
- A market never moves in isolation.
- An analysis of one market must include an analysis of all the markets.
- The four main market groups are the stock, bond, commodities, and currency markets.
These are the basic principles on which the Intermarket approach is built. The rules that follow are derived from these principles. Remembering these principles is critical to trading with the Intermarket approach or incorporating Intermarket analysis into your trading system.
Intermarket Analysis & Technical Analysis
Technical analysis is based on the evaluation of a single market. When evaluating the stock market, most technical traders would not look beyond the stock market. The bond, currency, or commodities markets would not be considered. Intermarket analysis is different. When analyzing the stock market, the Intermarket trader will also examine the Forex market (to consider how money is flowing), the bond market (to consider interest rates), the commodities market (to consider inflationary trends), and the foreign markets (to consider the impact of global market trends).
Intermarket Analysis & Fundamental Analysis
Fundamental analysis is very similar to the Intermarket approach. In fact, fundamental analysis can be considered a subset of Intermarket analysis or vice versa. Both approaches examine basic economic factors and data. However, fundamental analysis is limited to a single market approach while Intermarket analyis examines multiple markets simultaneously.
Who uses Intermarket Analysis?
Intermarket analysis was developed and popularized by John Murphy. He began trading as a strictly technical trader, but later expanded his research. He analyzed the interrelatedness of the markets in developing this Intermarket approach to forecasting price movements. Today, many different types of traders incorporate the Intermarket approach.
- Technicians (or technical traders) can incorporate the Intermarket approach into their trading strategies.
- Fundamentalists (or fundamental traders) have always used the Intermarket approach to a lesser degree. Now, they consider the movement of other markets as closely as they consider movements in their primary markets.
Intermarket analysis is a new and dynamic approach to forecasting. It can be incorporated into nearly every trading system and analytical approach to studying the market. It builds a picture of the market on many levels. Just try not to get stuck looking for all the pieces to the puzzle!
