Intermarket Analysis as a Useful Trading Filter

This article written by Arne and Falk Elsner was originally published in the March 2014 issue of Traders' Magazine.
 

• Arne and Falk Elsner have specialised in the main liquid markets and have been working for years with optimised trading systems on the short- and medium-term time levels. Professional trading and individual coaching are the two brothers’ core competencies

The principle of intermarket analysis is based on the interplay between the four major asset classes: bonds, stocks, commodities, and currencies. By reading the “language of the markets”, the intermarket model provides a suitable analytical basis for effective trading. Besides an introduction to “intermarkets”, this article offers concrete applications for trading and ways of optimising existing trading strategies. Based on the “crossover“ strategy, the possibilities offered by intermarket analysis as a logical trading filter will be presented.

I. Introduction to Intermarket Analysis

Intermarket analysis is all about the global capital flows in financial markets. The bond, stock, currency, and commodity markets are interrelated. If one of these markets is in an uptrend, this will have an impact on all the other markets. Intermarket analysis helps the trader tap into these very capital market flows. The multi-market approach presented below makes it possible for over and undervaluations to be recognised, providing insights into the expected market development. The past has shown that developments in the financial markets repeat themselves in similar market conditions. It is these fundamental interactions that intermarket analysis is based on. Those who understand the language of the markets will gain a better understanding of the future direction of capital market flows.

Combining Intermarkets with the Market and Business Cycles

The economy develops in a cyclical sequence of expansions and contractions. This constant change is called an economic or business cycle. It can be perfectly harmonised with the intermarket model. The market cycle relevant to traders precedes the business cycle since it is the future that is traded on the stock market. Figure 2 shows the idealised performance of the market cycle with the high and low points of the stock market.

The Stock Market Cycle Is a Harbinger of Highs and Lows

The market cycle can be divided into several stages during which the fundamental parameters on the financial markets change and new trend directions emerge. Important factors in this interplay include interest-rate developments, currency trends, the level of bond yields, and inflationary tendencies. They are the kind of fertile ground for whatever developments occur in the financial markets and these are reflected in the price charts. The occurrence and succession of distinctive performance highs and lows in the price charts of the bond, stock, currency, and commodity markets offer the intermarket analyst orientation and forecasting possibilities.

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