<s> INTERMARKET Technical ANAlysySTRADING STRATEGIESFOR THE GLOBALSTOCK, BOND, COMMODITY,AND CURRENCY MARKETS"It's a tribute to Murphy that he's covered ground here that will becomestandard within a decade. This is great work."—John SweeneyTechnical Analysis of Stocks andCommodities MagazineEvents of the past decade have made it clear that markets don't move inisolation. Tremors in Tokyo are felt in London and New York; the futurespits in Chicago move prices on the stock exchanges worldwide. As aresult, technical analysis is quickly evolving to take these intermarketrelationships into consideration. Written by John Murphy, one of theworld's lead ing technical analysts, this groundbreaking book explains"these relationships in terms that any trader and investor—regardless ofhis or her technical background—can understand and profit from.• Reveals key relationships you should understand—including the relationship between commodity prices and bonds, stocks and bonds,commodities and the U.S. dollar, the dollar versus interest rates andstocks, and more• Explains the impact of intermarket relationships on U.S. and foreignstock markets, commodities, interest rates, and currencies• Includes numerous charts and graphs that reveal the interrelationshipbetween stocks, bonds, commodities, and currenciesIntermarket Technical Analysis explores the art and science of technicalanalysis at its state-of-the-art level. It's for all traders and investors whorecognize the globalization of today's financial markets and are eager tocapitalize on i t .
John Wiley & Sons, Inc.Professional, Reference and Trade Group605 Third Avenue, New York, NY. 10158-0012New York • Chichester • Brisbane • Toronto • Singapore
INTERMARKETTECHNICALANALYSISTRADING STRATEGIESFOR THE GLOBALSTOCK, BOND, COMMODITYAND CURRENCY MARKETSJohn J. Murphy
Wiley Finance EditionsJOHN WILEY & SONS, INC.New York • Chichester • Brisbane • Toronto • Singapore
In recognition of the importance of preserving what hasbeen written, it is a policy of John Wiley & Sons, Inc. tohave books of enduring value printed on acid-free paper,and we exert our best efforts to that end.Copyright ©1991 by John J. MurphyPublished by John Wiley & Sons, Inc.All rights reserved. Published simultaneously in Canada.Reproduction or translation of any part of this workbeyond that permitted by Section 107 or 108 of the1976 United States Copyright Act without the permissionof the copyright owner is unlawful. Requests forpermission or further information should be addressed tothe Permissions Department, John Wiley & Sons, Inc.This publication is designed to provide accurate andauthoritative information in regard to the subjectmatter covered. It is sold with the understanding thatthe publisher is not engaged in rendering legal, accounting,or other professional service. If legal advice or otherexpert assistance is required, the services of a competentprofessional person should be sought. From a Declarationof Principles jointly adopted by a Committee of theAmerican Bar Association and a Committee of Publishers.
ContentsPreface1
A New Dimension in Technical Analysis
2 The 1987 Crash Revisited—an Intermarket Perspective
v112
3
Commodity Prices and Bonds
20
4
Bonds Versus Stocks
40
5
Commodities and the U.S. Dollar
6 The Dollar Versus Interest Rates and Stocks
5674
Library of Congress Cataloging-in-Publication Data
7 Commodity Indexes
95
Murphy, John J.Intermarket technical analysis: trading strategiesfor the global stock, bond, commodity, and currency markets /John J. Murphy.p. cm. — (Wiley finance editions)Includes index.ISBN 0-471-52433-6 (cloth)1. Investment analysis. 2. Portfolio management. I. Title.II. Series.HG4529.M86 1991332.6-dc2090-48567
8
International Markets
122
9
Stock Market Groups
149
Printed in the United States of America20 19 18 17 16 15 14 13
10 The Dow Utilities as a Leading Indicator of Stocks
173
11
Relative-Strength Analysis of Commodities
186
12
Commodities and Asset Allocation
206
13
Intermarket Analysis and the Business Cycle
225
14
The Myth of Program Trading
240
15 A New Direction
253
Appendix
259
Glossary
273
Index
277III
To Patty, my friendand
to Clare and Brian
PrefaceLike that of most technical analysts, my analytical work for many years relied ontraditional chart analysis supported by a host of internal technical indicators. Aboutfive years ago, however, my technical work took a different direction. As consultingeditor for the Commodity Research Bureau (CRB), I spent a considerable amount oftime analyzing the Commodity Research Bureau Futures Price Index, which measuresthe trend of commodity prices. I had always used the CRB Index in my analysis ofcommodity markets in much the same way that equity analysts used the Dow JonesIndustrial Average in their analysis of common stocks. However, I began to noticesome interesting correlations with markets outside the commodity field, most notablythe bond market, that piqued my interest.The simple observation that commodity prices and bond yields trend in thesame direction provided the initial insight that there was a lot more information tobe got from our price charts, and that insight opened the door to my intermarketjourney. As consultant to the New York Futures Exchange during the launching ofa futures contract on the CRB Futures Price Index, my work began to focus on therelationship between commodities and stocks, since that exchange also trades a stockindex futures contract. I had access to correlation studies being done between thevarious financial sectors: commodities, Treasury bonds, and stocks. The results ofthat research confirmed what I was seeing on my charts—namely, that commodities,bonds, and stocks are closely linked, and that a thorough analysis of one shouldinclude consideration of the other two. At a later date, I incorporated the dollar intomy work because of its direct impact on the commodity markets and its indirectimpact on bonds and stocks.The turning point for me came in 1987. The dramatic market events of that yearturned what was an interesting theory into cold reality. A collapse in the bond marketduring the spring, coinciding with an explosion in the commodity sector, set the stageV
vi
1
PREFACE
for the stock market crash in the fall of that year. The interplay between the dollar, thecommodity markets, bonds, and stocks during 1987 convinced me that intermarketanalysis represented a critically important dimension to technical work that couldno longer be ignored.• Another by-product of 1987 was my growing awareness of the importance ofinternational markets as global stock markets rose and fell together that year. I noticedthat activity in the global bond and stock markets often gave advance warnings ofwhat our markets were up to. Another illustration of global forces at work was givenat the start of 1990, when the collapse in the American bond market during the firstquarter was foreshadowed by declines in the German, British, and Japanese markets.The collapse in the Japanese stock market during the first quarter of 1990 also gaveadvance warning of the coming drop in other global equity markets, including ourown, later that summer.This book is the result of my continuing research into the world of intermarketanalysis. I hope the charts that are included will clearly demonstrate the interrelationships that exist among the various market sectors, and why it's so important to beaware of those relationships. I believe the greatest contribution made by intermarketanalysis is that it improves the technical analyst's peripheral trading vision. Trying totrade the markets without intermarket awareness is like trying to drive a car withoutlooking out the side and rear windows—in other words, it's very dangerous.The application of intermarket analysis extends into all markets everywhere onthe globe. By turning the focus of the technical analyst outward instead of inward,intermarket analysis provides a more rational understanding of technical forces atwork in the marketplace. It provides a more unified view of global market behavior.Intermarket analysis uses activity in surrounding markets in much the same waythat most of us have employed traditional technical indicators, that is, for directionalclues. Intermarket analysis doesn't replace other technical work, but simply addsanother dimension to it. It also has some bearing on interest rate direction, inflation,Federal Reserve policy, economic analysis, and the business cycle.The work presented in this book is a beginning rather than an end. There's stilla lot that remains to be done before we can fully understand how markets relateto one another. The intermarket principles described herein, while evident in mostsituations, are meant to be used as guidelines in market analysis, not as rigid ormechanical rules. Although the scope of intermarket analysis is broad, forcing us tostretch our imaginations and expand our vision, the potential benefit is well worththe extra effort. I'm excited about the prospects for intermarket analysis, and I hopeyou'll agree after reading the following pages.John J. MurphyFebruary 1991
A New Dimensionin Technical Analysis
One of the most striking lessons of the 1980s is that all markets are interrelated—financial and nonfinancial, domestic and international. The U.S. stock market doesn'ttrade in a vacuum; it is heavily influenced by the bond market. Bond prices are verymuch affected by the direction of commodity markets, which in turn depend on thetrend of the U.S. dollar. Overseas markets are also impacted by and in turn havean impact on the U.S. markets. Events of the past decade have made it clear thatmarkets don't move in isolation. As a result, the concept of technical analysis isnow evolving to take these intermarket relationships into consideration. Intermarkettechnical analysis refers to the application of technical analysis to these intermarketlinkages.The idea behind intermarket analysis seems so obvious that it's a mystery why wehaven't paid more attention to it sooner. It's not unusual these days to open a financialnewspaper to the stock market page only to read about bond prices and the dollar. Thebond page often talks about such things as the price of gold and oil, or sometimeseven the amount of rain in Iowa and its impact on soybean prices. Reference isfrequently made to the Japanese and British markets. The financial markets haven'treally changed, but our perception of them has.Think back to 1987 when the stock market took its terrible plunge. Rememberhow all the other world equity markets plunged as well. Remember how those sameworld markets, led by the Japanese stock market, then led the United States out ofthose 1987 doldrums to record highs in 1989 (see Figure 1.1).Turn on your favorite business show any morning and you'll get a recap of theovernight developments that took place overseas in the U.S. dollar, gold and oil,treasury bond prices, and the foreign stock markets. The world continued tradingwhile we slept and, in many cases, already determined how our markets were goingto open that morning.1
A NEW DIMENSION IN TECHNICAL ANALYSISFIGURE 1.1A COMPARISON Of THE WORLD'S THREE LARGEST EQUITY MARKETS: THE UNITED STATES,JAPAN, AND BRITAIN. GLOBAL MARKETS COLLAPSED TOGETHER IN 1987. THE SUBSEQUENTGLOBAL STOCK MARKET RECOVERY THAT LASTED THROUGH THE END OF 1989 WAS LED BYTHE JAPANESE MARKET.World Equity Trends
THE PURPOSE OF THIS BOOK
3
was a time when stock traders didn't watch bond prices too closely, when bondtraders didn't pay too much attention to commodities. Study of the dollar was left tointerbank traders and multinational corporations. Overseas markets were somethingwe knew existed, but didn't care too much about.It was enough for the technical analyst to study only the market in question. Toconsider outside influences seemed like heresy. To look at what the other marketswere doing smacked of fundamental or economic analysis. All of that is nowchanging. Intermarket analysis is a step in another direction. It uses information inrelated markets in much the same way that traditional technical indicators have beenemployed. Stock technicians talk about the divergence between bonds and stocks inmuch the same way that they used to talk about divergence between stocks and theadvance/decline line.Markets provide us with an enormous amount of information. Bonds tell uswhich way interest rates are heading, a trend that influences stock prices. Commodityprices tell us which way inflation is headed, which influences bond prices andinterest rates. The U.S. dollar largely determines the inflationary environment andinfluences which way commodities trend. Overseas equity markets often providevaluable clues to the type of environment the U.S. market is a part of. The job ofthe technical trader is to sniff out clues wherever they may lie. If they lie in anothermarket, so be it. As long as price movements can be studied on price charts, and aslong as it can be demonstrated that they have an impact on one another, why nottake whatever useful information the markets are offering us? Technical analysis isthe study of market action. No one ever said that we had to limit that study to onlythe market or markets we're trading.Intermarket analysis represents an evolutionary step in technical analysis.Intermarket work builds on existing technical theory and adds another step tothe analytical process. Later in this chapter, I'll discuss why technical analysisis uniquely suited to this type of investigative work and why technical analysisrepresents the preferred vehicle for intermarket analysis.THE PURPOSE OF THIS BOOK
Reproduced with permisson by Knight Bidder's Tradecenter. Tradecenter is a registered trademark of Knight Ridder's Financial Information.
ALL MARKETS ARE RELATED
What this means for us as traders and investors is that it is no longer possible tostudy any financial market in isolation, whether it's the U.S. stock market or goldfutures. Stock traders have to watch the bond market. Bond traders have to watchthe commodity markets. And everyone has to watch the U.S. dollar. Then there's theJapanese stock market to consider. So who needs intermarket analysis? I guess justabout everyone; since all sectors are influenced in some way, it stands to reason thatanyone interested in any of the financial markets should benefit in some way fromknowledge of how intermarket relationships work.IMPLICATIONS FOR TECHNICAL ANALYSIS
Technical analysis has always had an inward focus. Emphasis was placed on a particular market to which a host of internal technical indicators were applied. There
The goal of this book is to demonstrate how these intermarket relationships work in away that can be easily recognized by technicians and nontechnicians alike. You won'thave to be a technical expert to understand the argument, although some knowledgeof technical analysis wouldn't hurt. For those who are new to technical work, some ofthe principles and tools employed throughout the book are explained in the Glossary.However, the primary focus here is to study interrelationships between markets, notto break any new ground in the use of traditional technical indicators.We'll be looking at the four market sectors—currencies, commodities, bonds,and stocks—as well as the overseas markets. This is a book about the study of marketaction. Therefore, it will be a very visual book. The charts should largely speak forthemselves. Once the basic relationships are described, charts will be employed toshow how they have worked in real life.Although economic forces, which are impossible to avoid, are at work here, thediscussions of those economic forces will be kept to a minimum. It's not possible todo intermarket work without gaining a better understanding of the fundamental forcesbehind those moves. However, our intention will be to stick to market action and keepeconomic analysis to a minimum. We will devote one chapter to a brief discussion
4
A NEW DIMENSION IN TECHNICAL ANALYSIS
of the role of intermarket analysis in the business cycle, however, to provide a usefulchronological framework to the interaction between commodities, bonds, and stocks.FOUR MARKET SECTORS: CURRENCIES,COMMODITIES, BONDS, AND STOCKSThe key to intermarket work lies in dividing the financial markets into these foursectors. How these four sectors interact with each other will be shown by various visual means. The U.S. dollar, for example, usually trades in the opposite direction ofthe commodity markets, in particular the gold market. While individual commoditiessuch as gold and oil are discussed, special emphasis will be placed on the Commodity Research Bureau (CRB) Index, which is a basket of 21 commodities and the most
FIGURE 1.2A LOOK AT THE FOUR MARKET SECTORS-CURRENCIES, COMMODITIES, BONDS, ANDSTOCKS—IN 1989. FROM THE SPRING TO THE AUTUMN OF 1989, A FIRM U.S. DOLLAR HADA BEARISH INFLUENCE ON COMMODITIES. WEAK COMMODITY PRICES COINCIDED WITHA RISING BOND MARKET, WHICH IN TURN HAD A BULLISH INFLUENCE ON THE STOCKMARKET.Dollar Index
CRB Index
Stocks
Bonds
BASIC PREMISES OF INTERMARKET WORK
5
widely watched gauge of commodity price direction. Other commodity indexes willbe discussed as well.The strong inverse relationship between the CRB Index and bond prices will beshown. Events of 1987 and thereafter take on a whole new light when activity in theCRB Index is factored into the financial equation. Comparisons between bonds andstocks will be used to show that bond prices provide a useful confirming indicatorand often lead stock prices.I hope you'll begin to see that if you're not watching these relationships, you'remissing vital market information (see Figure 1.2).You'll also see that very often stock market moves are the end result of a rippleeffect that flows through the other three sectors—a phenomenon that carries importantimplications in the area of program trading. Among the financial media and thosewho haven't acquired intermarket awareness, "program trading" is often unfairlyblamed for stock market drops without any consideration of what caused the programtrading in the first place. We'll deal with the controversial subject of program tradingin Chapter 14.BASIC PREMISES OF INTERMARKET WORK
Before we begin to study the individual relationships, I'd like to lay down some basicpremises or guidelines that I'll be using throughout the book. This should provide auseful framework and, at the same time, help point out the direction we'll be going.Then I'll briefly outline the specific relationships we'll be focusing on. There arean infinite number of relationships that exist between markets, but our discussionswill be limited to those that I have found most useful and that I believe carry themost significance. After completion of the overview contained in this chapter, we'llproceed in Chapter 2 to the events of 1987 and begin to approach the material inmore specific fashion. These, then, are our basic guidelines:1.2.3.4.5.6.
All markets are interrelated; markets don't move in isolation.Intermarket work provides important background data.Intermarket work uses external, as opposed to internal, data.Technical analysis is the preferred vehicle.Heavy emphasis is placed on the futures markets.Futures-oriented technical indicators are employed.
These premises form the basis for intermarket analysis. If it can be shown that allmarkets—financial and nonfinancial, domestic and global—are interrelated, and thatall are just part of a greater whole, then it becomes clear that focusing one's attentionon only one market without consideration of what is happening in the others leavesone in danger of missing vital directional clues. Market analysis, when limited toany one market, often leaves the analyst in doubt. Technical analysis can tell animportant story about a common stock or a futures contract. More often than not,however, technical readings are uncertain. It is at those times that a study of a relatedmarket may provide critical information as to market direction. When in doubt, lookto related markets for clues. Demonstrating that these intermarket relationships exist,and how they can be incorporated into our technical work, is the major task of thisbook.
EMPHASIS ON THE FUTURES MARKETS6
7
A NEW DIMENSION IN TECHNICAL ANALYSIS
INTERMARKET ANALYSIS AS BACKGROUND INFORMATION
The key word here is "background." Intermarket work provides backgroundinformation, not primary information. Traditional technical analysis still has to beapplied to the markets on an individual basis, with primary emphasis placed on themarket being traded. Once that's done, however, the next step is to take intermarketrelationships into consideration to see if the individual conclusions make sense froman intermarket perspective.Suppose intermarket work suggests that two markets usually trend in oppositedirections, such as Treasury bonds and the Commodity Research Bureau Index.Suppose further that a separate analysis of the top markets provides a bullish outlookfor both at the same time. Since those two conclusions, arrived at by separate analysis,contradict their usual inverse relationship, the analyst might want to go back andreexamine the individual conclusions.There will be times when the usual intermarket relationships aren't visible or,for a variety of reasons, appear to be temporarily out of line. What is the trader to dowhen traditional technical analysis clashes with intermarket analysis? At such times,traditional analysis still takes precedence but with increased caution. The trader whogets bullish readings in two markets that usually don't trend in the same directionknows one of the markets is probably giving false readings, but isn't sure which one.The prudent course at such times is to fall back on one's separate technical work, butto do so very cautiously until the intermarket work becomes clearer.Another way to look at it is that intermarket analysis warns traders when theycan afford to be more aggressive and when they should be more cautious. They mayremain faithful to the more traditional technical work, but intermarket relationshipsmay. serve to warn them not to trust completely what the individual charts areshowing. There may be other times when intermarket analysis may cause a traderto override individual market conclusions. Remember that intermarket analysis ismeant to add to the trader's data, not to replace what has gone before. I'll try toresolve this seeming contradiction as we work our way through the various examplesin succeeding chapters.EXTERNAL RATHER THAN INTERNAL DATA
Traditional technical work has tended to focus its attention on an individual market,such as the stock market or the gold market. All the market data needed to analyzean individual market technically—price, volume, open interest—was provided bythe market itself. As many as 40 different technical indicators—on balance volume,moving averages, oscillators, trendlines, and so on—were applied to the market alongwith various analytical techniques, such as Elliott Wave theory and cycles. The goalwas to analyze the market separately from everything else.Intermarket analysis has a totally different focus. It suggests that importantdirectional clues can be found in related markets. Intermarket work has a moreoutward focus and represents a different emphasis and direction in technical work.One of the great advantages of technical analysis is that it is very transferable.A technician doesn't have to be an expert in a given market to be able to analyzeit technically. If a market is reasonably liquid, and can be plotted on a chart, atechnical analyst can do a pretty adequate job of analyzing it. Since intermarketanalysis requires the analyst to look at so many different markets, it should be obviouswhy the technical analyst is at such an advantage.
Technicians don't have to be experts in the stock market, bond market, currencymarket, commodity market, or the Japanese stock market to study their trendsand their technical condition. They can arrive at technical conclusions and makeintermarket comparisons without understanding the fundamentals of each individualmarket. Fundamental analysts, by comparison, would have to become familiar withall the economic forces that drive each of these markets individually—a formidable'task that is probably impossible. It is mainly for this reason that technical analysisis the preferred vehicle for intermarket work.EMPHASIS ON THE FUTURES MARKETS
Intermarket awareness parallels the development of the futures industry. The mainreason that we are now aware of intermarket relationships is that price data is nowreadily available through the various futures markets that wasn't available just 15 yearsago. The price discovery mechanism of the futures markets has provided the catalystthat has sparked the growing interest in and awareness of the interrelationships amongthe various financial sectors.In the 1970s the New York commodity exchanges expanded their list oftraditional commodity contracts to include inflation-sensitive markets such asgold and energy futures. In 1972 the Chicago Mercantile Exchange pioneered thedevelopment of the first financial futures contracts on foreign currencies. Starting in1976 the Chicago exchanges introduced a new breed of financial futures contractscovering Treasury bonds and Treasury bills. Later on, other interest rate futures, suchas Eurodollars and Treasury notes, were added. In 1982 stock index futures wereintroduced. In the mid-1980s in New York, the Commodity Research Bureau FuturesPrice Index and the U.S. Dollar Index were listed.Prior to 1972 stock traders followed only stocks, bond traders only bonds,currency traders only currencies, and commodity traders only commodities. After1986, however, traders could pick up a chart book to include graphs on virtuallyevery market and sector. They could see right before their eyes the daily movementsin the various futures markets, including agricultural commodities, copper, gold, oil,the CRB Index, the U.S. dollar, foreign currencies, bond, and stock index futures.Traders in brokerage firms and banks could now follow on their video screens theminute-by-minute quotes and chart action in the four major sectors: commodities,currencies, bonds, and stock index futures. It didn't take long for them to notice thatthese four sectors, which used to be looked at separately, actually fed off one another.A whole new way to look at the markets began to evolve.On an international level, stock index futures were introduced on variousoverseas equities, in particular the British and Japanese stock markets. As variousfinancial futures contracts began to proliferate around the globe, the world suddenlyseemed to grow smaller. In no small way, then, our ability to monitor such a broadrange of markets and our increased awareness of how they interact derive from thedevelopment of the various futures markets over the past 15 years.It should come as no surprise, then, that the main emphasis in this book will beon the futures markets. Since the futures markets cover every financial sector, theyprovide a useful framework for our intermarket work. Of course, when we talk aboutstock index futures and bond futures, we're also talking about the stock market andthe Treasury bond market as well. We're simply using the futures markets as proxiesfor all of the sectors under study.
8
A NEW DIMENSION IN TECHNICAL ANALYSIS
Since most of our attention will be focused on the futures markets, I'llbe employing technical indicators that are used primarily in the futures markets.There is an enormous amount of overlap between technical analysis of stocks andfutures, but there are certain types of indicators that are more heavily used in eacharea.For one thing, I'll be using mostly price-based indicators. Readers familiar withtraditional technical analysis such as price pattern analysis, trendlines, support andresistance, moving averages, and oscillators should have no trouble at all.Those readers who have studied my previous book, Technical Analysis of theFutures Markets (New York Institute of Finance/Prentice-Hall, 1986) are already wellprepared. For those newer to technical analysis, the Glossary gives a brief introductionto some of the work we will be employing. However, I'd like to stress that whilesome technical work will be employed, it will be on a very basic level and is notthe primary i focus. Most of the charts employed will be overlay, or comparison,charts that simply compare the price activity between two or three markets. Youshould be able to see these relationships even with little or no knowledge of technical analysis.Finally, one other advantage of the price-based type of indicators widely used inthe futures markets is that they make comparison with related markets, particularlyoverseas markets, much easier. Stock market work, as it is practiced in the UnitedStates, is very heavily oriented to the use of sentiment indicators, such as the degreeof bullishness among trading advisors, mutual fund cash levels, and put/call ratios.Since many of the markets we will be looking at do not provide the type of data neededto determine sentiment readings, the price-oriented indicators I will be employinglend themselves more readily to intermarket and overseas comparisons.THE IMPORTANT ROLEOF THE COMMODITY MARKETS
Although our primary goal is to examine intermarket relationships between financialsectors, a lot of emphasis will be placed on the commodity markets. This is donefor two reasons. First, we'll be using the commodity markets to demonstrate howrelationships within one sector can be used as trading information. This shouldprove especially helpful to those who actually trade the commodity markets. Thesecond, and more important, reason is based on my belief that commodity marketsrepresent the least understood of the market sectors that make up the intermarketchain. For reasons that we'll explain later, the introduction of a futures contract onthe CRB Index in mid-1986 put the final piece of the intermarket structure in placeand helped launch the movement toward intermarket awareness.The key to understanding the intermarket scenario lies in recognizing the oftenoverlooked role that the commodity markets play. Those readers who are moreinvolved with the financial markets, and who have not paid much attention tothe commodity markets, need to learn more about that area. I'll spend some time,therefore, talking about relationships within the commodity markets themselves, andthen place the commodity group as a whole into the intermarket structure. To performthe latter task, I'll be employing various commodity indexes, such as the CRB Index.However, an adequate understanding of the workings of the CRB Index involvesmonitoring the workings of certain key commodity sectors, such as the preciousmetals, energy, and grain markets.
THE STRUCTURE OF THIS BOOK
9
KEY MARKET RELATIONSHIPS
These then are the primary intermarket relationships we'll be working on. We'll beginin the commodity sector and work our way outward into the three other financialsectors. We'll then extend our horizon to include international markets. The keyrelationships are:1. Action within commodity groups, such as the relationship of gold to platinumor crude to heating oil.2. Action between related commodity groups, such as that between the preciousmetals and energy markets.3. The relationship between the CRB Index and the various commodity groups andmarkets.4. The inverse relationship between commodities and bonds.5. The positive relationship between bonds and the stock market.6. The inverse relationship between the U.S. dollar and the various commoditymarkets, in particular the gold market.7. The relationship between various futures markets and related stock marketgroups, for example, gold versus gold mining shares.8. U.S. bonds and stocks versus overseas bond and stock markets.THE STRUCTURE OF THIS BOOK
This chapter introduces the concept of intermarket technical analysis and providesa general foundation for the more specific work to follow. In Chapter 2, the eventsleading up to the 1987 stock market crash are used as the vehicle for providing anintermarket overview of the relationships between the four market sectors. I'll showhow the activity in the