Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets is a comprehensive discussion of how and why all markets, whether financial, non financial, international, domestic, or the like, are inextricably related and intertwined with each other. Although the multitude of different markets are technically distinct entities, the wise and successfully foreign currency exchange trader will understand the nature of their interrelationship and use that information effectively when making trading decisions.
Why be concerned with interrelated markets?
Many foreign exchange currency market traders believe they should devote all of their time and energy to understanding and participating in the foreign exchange currency market. This approach, however, has some serious flaws that will inevitably end up costing these traders money. Why? Because in our increasingly globalized world economy, there is no such thing as an isolated market that behaves solely based on its own rules, assumptions, and factors.
Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets is an excellent book that every trader, big or small, should read and understand because it so clearly explains why the single, isolated market mindset is no longer the right way to approach foreign currency exchange market trading. The author, John Murphy, makes the case for how and why interrelated markets are so important and what the reader, as an individual trader, needs to do to profit in the interrelated financial marketplace.
Evidence of the effects of interrelated markets
The evidence for increasing effects of interrelated markets is found clearly in technical analysis. Author Murphy is one of the leading technical analysts in the world, with a track record of financial results and publications to support his expertise. He is so expert, in fact, that one of his books, Technical Analysis of the Futures Markets, is an integral part of the certification program and examination conducted by the Market Technicians Association for those wanting to earn the designation Certified Market Technician (CMT).
Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets begins with a thorough examination of the financial markets and their behaviour in the 1980’s, especially the significant market plunge of 1987. In this discussion, Murphy lays out the fundamentals of interrelated markets and introduces the concept of intermarket technical analysis. It is this new approach to technical analysis that has taken the foreign currency exchange market by storm, helping traders of all types to benefit from the knowledge and opportunities that intermarket technical analysis uncovers.
Traditional approach vs. intermarket approach to technical analysis
Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets takes a detailed look at the traditional approach to technical analysis, in which the focus of analysis is entirely inward. In other words, the technical indicators to which the market looks for insight are based on internal measurements which to analysts and markets traders alike are viewed as the only indicators of importance to that particular market.
Intermarket technical analysis, however, has emerged in the last twenty years as a far superior and much more accurate way for traders to assess financial markets. This approach recognizes that in our global economy and internet connected world, all financial markets are interrelated and their effects on each other can appear literally within a few hours in extreme situations. Bonds affect interest rates, interest rates affect stock prices, commodities indicate inflation, which in turn affects bonds and interest rates. Add in the foreign currency exchange market, where the U.S. dollar and its performance have a significant effect on inflation and commodities, and you can begin to see why the traditional isolated market technical analysis approach simply does not work any longer.
Four interrelated financial markets
This information packed book sets the foundation for its discussions by dividing the financial markets into four key sectors:
- Currencies
- Bonds
- Commodities
- Stocks
The basic relationships among these four sectors are described in the text, but also illustrated visually with some excellent graphs. Murphy makes liberal use of charts and graphs throughout Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets, which is one of the major reasons why the book is so accessible, clear, and easy to understand.
Topics discussed in the book
Once the author has established the four financial market sectors and laid out the basic guidelines for understanding the information to be presented, he moves into a wonderful array of topics. These include:
- Overview of why intermarket technical analysis is important to understand and use
- Review of the 1987 market crash, from the perspective of intermarket technical analysis
- Bonds and commodity interrelationships
- Stocks and bonds interrelationships
- U.S. dollar and commodities interrelationships
- U.S. dollar, stocks, and interest rates
- Discussion of commodity indexes
- Discussion of international markets
- Discussion of stock market groups
- The importance of Dow Utilities as a key indicator of the stock market
- Use of relative strength analysis for researching commodities
- Asset allocation and commodities
- The business cycle and intermarket analysis
- Myths and misperceptions about program trading
- Future direction of intermarket technical analysis
Murphy makes it very clear right at the beginning that the major focus of the book is on examining and understanding the actual actions and movements of the four market sectors in relation to each other, rather than on examining and understanding economic factors that also come into play. He acknowledges the importance of economic analysis (and discusses it in the chapter on the business cycle and intermarket analysis) but devotes the bulk of the content to market behaviours and their interrelationships.
Final thoughts
In hindsight, it’s somewhat surprising that the intermarket technical analysis approach did not emerge sooner than it did because the evidence of intermarket relationships has been there for many decades. Many newspapers include information about all of these financial markets, not just traditional stocks, and the international markets are also covered in most financial sections. What brought intermarket technical analysis to the forefront was the volatile market activities of the 1980’s, and what has accelerated the value and importance of technical analysis is the dramatic speed and interconnection created by the explosion of the internet.
Although the original copyright for Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets was issued in 1991, the information in this book is just as valuable and applicable today as it was when it was originally published. Thanks to the internet, financial markets around the globe are more connected and interrelated than ever before. That’s why the content in this book is still so valuable; it is also extremely easy to understand thanks especially to the liberal use of illustrations, charts, and graphs. Although the real world examples used in the book are all pre-1991, the concepts they illustrate are still valid and appropriate in our modern financial world.
Regardless of whether a trader focuses exclusively on the foreign currency exchange market or participate in a wider range of financial markets, this book should be mandatory reading. Its explanations and focus on how financial markets affect and influence each other is excellent, and while it is not a tightly focused resource on financial currency exchange trading alone, it still offers exceptional information and insight into better understanding this unique market.