What Intermarket Analysis Means to You

11/22/2011 9:45 am EST

Focus: TRADING

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

Traders can use intermarket analysis to glean helpful signals on a multitude of correlated markets, explains John Jagerson, citing known currency, commodity, and equity market correlations.

Traders and investors may have heard the term “intermarket analysis,” but what does it mean for you? Our guest today is John Jagerson to talk about that. So, John, first of all, define intermarket analysis for us.

Well, I would define it as a technical methodology of analyzing the market where you may be using some other market or index to draw conclusions or trading signals about what you’re actually trading. 

For instance, you may look at the Volatility Index (VIX), which covers the S&P 500, as a signal generator for taking positions in the stock market itself.

See related: Using VIX as a Market Indicator

I know people are always looking for a leading indicator in that way. They’re looking for something outside of the market they’re trading to give them some clues. Is that a valid method?

Leading indicators are tough because if the markets are closely enough related to be using intermarket analysis, they’re going to have a certain amount of correlation. 

The real benefit here is that the trading signals in an intermarket indicator may be much more clear.

For instance, if you were trading gold stocks, and you had a very clear technical breakout in gold itself, you might transfer that signal into a position in gold stock where you have additional volatility and potentially better profits. 

Is there another example of correlated markets that I should be looking at if I’m trading currencies? Should I be looking at something outside of that?

Absolutely. Correlations in the intermarket environment exist all the time. Sometimes they re-emerge over and over again in the currency market. 

A classic example would be how the EUR/USD in 2011 has been really correlated with how risk averse traders are feeling. So when they’re feeling a lot more confident, they’ll weaken the dollar and the EUR/USD begins to rise. 

Well, it’s the same relationship that has existed over time with USD/JPY and other currency pairs. So, it’s an opportunity whether you’re a currency trader or not to potentially use currency trends and currency technical signals.

It’s a very liquid market with a very firm trader commitment for timimg investments in or out of stocks, or vice versa.

Alright, now does this work on every time frame? Can I use intermarket analysis on even a one- or 15-minute chart, or is it more of a long-term thing we’re doing?

Well, the answer is both yes and no. It depends on how similar the markets are during the trading day. 

So, let’s assume that you’re focusing specifically on very short-term charts—one-minute, or five- or 15-minute charts—well, the market can get pretty thin for equities during the off hours compared to the forex, for example.  So I’d be a little bit more reluctant to transfer signals from one market to the other during the aftermarket hours, but while the markets are open and liquid, I would say, yes, you can look for those kinds of correlations and signals.

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