Why Intermarket Analysis?

02/23/2012 5:45 am EST

Focus: MARKETS

Patrick Ceresna

Chief Derivatives Market Strategist, Learn To Trade Global

Patrick Ceresna of Learn to Trade Global discusses what he means by intermarket analysis, and why he believes it can give the investor a different perspective.

Today, we are talking with Patrick Ceresna about intermarket analysis. Patrick, give us a rundown of what that means.

Oh, thank you. Basically, intermarket analysis using technical analysis is something that we focus a lot on in our finding of investments and trading opportunities.

The process of—or at least traditionally, most people that learn about technical analysis learn about things like indicators and trends, and they follow things along on an individual stock-by-stock basis. What we focus on is trying to understand the market as a whole, because every asset class affects another asset class, and if you don’t understand what is happening in the broader base of the markets, it is impossible to really know what the real trend would be in the future on an asset class.

So when we have something like the US dollar strengthening, it is going to naturally dampen commodity prices, and it is almost like an anchor being tied around someone’s feet when they are trying to swim. It is like they can try to stay afloat, but it is very difficult to do so.

If you don’t know that, if you don’t watch what the US dollar index is doing and you are trying to use a simple technical indicator on an oil chart saying it broke out, you are sort of missing the picture. You have to learn how to look at the markets as a whole…and that affects all the asset classes, whether you are talking about currencies, whether you are talking about bonds, stocks, or even commodities, such as gold, silver, oil, and copper. They are all intertwined.

So how do you use technicals then?

Well you know, fundamentals are important, but you need to be able to observe when trends are changing in a certain underlying.

So you need to be able to observe how and when a market has changed, or when it is getting heavy, or when it is going to turn, to know when it is going to affect another market. So it is using the actual observation of those markets on a technical chart rather than just looking at fundamental data.

So looking out over the longer term, Patrick, what are some of the signals that traders should be aware of?

Well, in the bigger picture, we are now seeing a US dollar that has been dropping for almost a year, year and a half, on a straight downward trend, which has allowed a lot of the markets to actually function very well.

But if we over the next little while see any robust US dollar rally, there would be certain implications for weakening commodity prices. It would strengthen bonds, and it certainly would damper the stock market.

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