Applying Intermarket Analysis to the Stock Market

Applying Intermarket Analysis to the Stock Market

Traditional technical analysis typically focuses on one market, one country and one asset class whereas intermarket analysis looks at multiple asset classes from nations around the globe. For the equity markets in particular, intermarket analysis represents a variety of comparisons of various broad market indexes from stock markets around the world.

Some common comparisons intermarket analysts apply to the U.S. equity markets include domestic broad market indexes to one another, market sector to the broad market indexes, and individual stocks to broad market indexes.

In addition, analysts compare stocks to one another within a sector as well as the relationship of price, time and volume to one another. Intermarket analysts also will compare the advance/decline line to the broad market indexes and track changes in interest rates to changes in stock indexes. All of this to get solid directional biases they can then use to trade.

Typically when intermarket comparisons are performed using the equity and futures markets the analyst is looking for short confirmation or divergence. This type of information can signal a potential change in market direction is about to take place. Intermarket analysts believe that futures can be tracked and can be used as a pre-cursor to movement in the equity markets. Some of the futures markets that are analyzed include the Standards and Poor s 500 Index, Treasury Bonds, crude oil and the U.S. Dollar Index all of which can have a strong impact on the stock market.

When looking at globally related markets the intermarket analyst looks for convergence or divergence from each other over a specific timeframe based on various global and economic developments. For example, changes in interest rates in the U.S. or Europe, currency devaluations or a surge in crude oil prices can have a very profound impact on the equity markets worldwide. One thing the intermarket analyst is keenly aware of is that virtually no market is exempt from globalization.

Today every market both domestically and internationally has some impact on every other even when they seem distant and unrelated. Intermarket analysts often point out that the outlook of any one market is incomplete without looking at it within an intermarket context. They contend that traders need to adopt an intermarket perspective and incorporate intermarket analysis into their trading strategies to best deal with the global financial markets, as they presently exist.

Intermarket analysis differs from single market analysis in a variety of ways. First, intermarket analysis looks at multiple markets simultaneously and analyzes their impacts on a target market. Intermarket analysis also leads the market when locating trading opportunities about to unfold and it allows traders to enter and exit trades just as the trend is changing.

Trends are typically identified as they are developing so traders can catch a bigger portion of each move and stops are placed based on how related markets are impacting the market being traded. In addition, when using intermarket analysis, false signals are minimized because the full picture is taken into consideration, not just a small piece of it. It is these types of differences between intermarket analysis and single-market analysis that have many traders preferring the intermarket analysis method.

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