Intermarket Analysis What is Intermarket Analysis? Intermarket analysis is a branch of technical analysis that examines the correlations between four major asset classes: stocks, bonds, commodities and currencies. In his classic book Trading with Intermarket Analysis, John Murphy notes that chartists can use these relationships to identify the stage of the business cycle and improve their forecasting abilities. There are clear relationships between stocks and bonds, bonds and commodities, and commodities and the Dollar. Knowing these relationships can help chartists determine the stage of the investing cycle, select the best sectors and avoid the worst-performing sectors. Inflationary Relationships The intermarket relationships depend on the forces of inflation or deflation.
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John Murphy has the expertise of two professions at once, as both a talented writer and an experienced trader who only stopped trading when the markets were closed. His writing covers everything related to technical analysis. Murphy has received several awards for his achievements. It is recommended reading for anyone who is involved with trading and investment in any way. This book, which has been translated into many languages, clearly lays out how to apply technical analysis to any areas that have charts showing price movements.
In its 16 chapters, the book provides comprehensive information about market analysis and about specialized areas of analysis with a considerably large number of case studies. The book begins with the philosophy of technical analysis. The second chapter describes the basic tenets of the Dow Theory, and from there the book transitions into charting, with detailed explanations of the pros and cons of each separate type of chart. The remaining chapters discuss trends, models of trend fractures and trend continuation, the importance of volume, moving averages — everything a trader needs to know in order to work in the markets.
To start with, he recommends mapping the trend. In order to do this, you have to understand whether the current market movement is the main trend or a correction. Increasing the scale helps to identify the main trend, which is important for all types of traders. On this gold chart M30 , we see sideways trendless movement. Gold H4 Chart Shows Downtrend The next rule advises to follow the trend On the chart below, you can use the top of the channel for the opening position in a downturn.
Downtrend on Gold chart Murphy warns that the market always has retracements. His book recommends using classic resistance levels along with Fibonacci levels.
Fibonacci levels are preferable for identifying retracements. The author recommends drawing trend lines as frequently as possible. The more times the trend line is confirmed on the chart, the more reliable the trend is. A chart normally stops showing movement once it has reached a significant level.
A single point where multiple lines cluster is a good time to open a position. The best way to work a trending market is to follow moving averages. The intersection of moving averages is an optimal place to open a position. You need to find the moving averages yourself, focusing on your own trading style. The indicators function in the range from 0 to RSI shows overbought greater than 70 and oversold less than 30 conditions.
For a Stochastic oscillator , overbought is over 80 and oversold is under When these indicators diverge, it usually signals a market downturn, but when trading in a corridor, these indicators complement each other and point to new movement. To identify a market trend, you must use the ADX indicator. It shows whether a trend exists, and its direction.
Murphy also devotes a tremendous amount of attention to the presence of volume and open interest. These are important parameters for the futures markets. Murphy says that volume always precedes price. A large volume must have a place in the direction of the prevailing trend.
Increasing open interest points to new money that is supporting the present trend. In the book, John affirms that the market is like a melting pot where money flows from one state into another, but still stays in the same pot. The recent crisis related to falling oil prices was a powerful impetus for a new uptrend for gold, which had been falling prior to that.
This is why the author encourages readers to search for relationships between things that seem to be unrelated at first glance. Consider the example of falling oil prices. Investors pulled out of oil, and they needed a reliable tool. This time it was gold, and gold prices started to increase sharply. There are many similar examples if you analyse the markets closely. The guru himself is constantly learning, and challenges his followers to do the same.
Always be a student and keep learning. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
John Murphy (technical analyst)
John Murphy’s Ten Laws of Technical Analysis
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