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Intermarket Technical Analysis

Posted on January 26, 2018

Intermarket Technical Analysis

Posted on January 26, 2018

Why will the SPY actually fall in the coming months?

  • Short answer: intermarket tech. analysis confirms it.
  • Long answer: start reading

Intermarket technical analysis has two rules of thumb to begin our analysis with.

  • Price tells no lie.
  • No markets act in a vacuum.

To wit, we start with the price level of the dollar which often dictates the trends in commodity prices.  Here’s how; money, and the ability to borrow it comes at a cost. The cost is the interest rate. Thus, as commodity prices (costs) rise or fall, so too interest rates often parallel the rise of fall or commodity prices.
Now, what moves opposite Interest Rates? Bonds.  So, “how does the bond trader know when the inflationary effects of a falling dollar are taking hold? The answer is when the commodity markets start to move higher.”1
Let’s re-phrase this: if the purchasing power of your dollar is falling, that will mean the price (cost) of goods will have to rise because your dollar’s buying power is declining.
Therefore, a confirming intermarket indicator to a falling dollar is that commodity prices have begun to rise along with Interest rates thus a falling Bond market.
1This is a direct quote form John. J. Murphy’s book, “Intermarket Technical Analysis,” page 57.
How to do intermarket analysis

  1. Dollar: think purchasing power.
  2. Commodities: think how cost is affected by your purchasing power.
  3. Interest Rates: think inflationary/deflationary effects of the cost to do business.
  4. Bonds: act opposite interest rates.
  5. Stocks: generally lag behind bonds and parallel their direction.

Now, for my supporting argument.
Between April 2017 and Sept. 2017 (see image 1), the dollar (UUP) fell.

During that same time, Commodities (DBC) fell along with the dollar until our initial ‘Buy Partial’ signal (see the Yellow Buy Partial Signal on 07.24.2017).  As the trend gained upward momentum you will see our Green ‘Buy Full’ signal triggered on 09.05.2017. Note, the trend kept going higher. This will come into play in the coming paragraphs. 

Then, move to GLD, in which you can see the simultaneous rise with our signal triggering on the same date (07.24.2017) between July and Sept. 2017.  This confirmed the rise in commodities prices.   


Now, look at TBX, the 10 year interest rate chart. See its gradual rise between Sept. 2017 and December 2017? (It’s very gradual, and yes, arguably looks like a flat trend). 


Now, look at the commodities chart (DBC) again.   Do you see the uptrend that began before Sept. 2017 and continued to rise into Dec. 2017? The fact that Commodities and interest rates moved up in tandem together, even with a slight lag time, illustrates the validity of using intermarket technical analysis as a means for seeing how markets interact with one another.  

But where is the evidence of rising, inflationary prices and rising interest rates? What do you do with this information? What the heck do you care? Remember, “How does a bond trader know when the inflationary effects of a falling dollar are taking hold? The answer is when the commodity markets start to move higher.”1
 Thus, when commodities begin to rise, we can see that it gradually lifts interest rates.  Since interest rates move opposite Bond Prices, we would suspect that the Bond market would decline.  Is that what happened when you look at the IEF Chart next? 

Now, let’s look at the SPY chart.  When lining it up to the other charts we can see that nothing has zigged or zagged yet.  Nothing but an uptrend so far.  This confirms the concept of lead/lag times.  This confirms that the stock market is the last domino to turn-over when starting from a falling dollar in April of 2017 and arriving at the current stock market right now.

What do you think?  Do the red circles at the end of each of these charts align with this intermarket ebb and flow, lead and lag that we’ve gone through?  Or are a number of negative divergences starting to appear?
We believe a stock market sell-off will occur.  To what degree or how soon is for another study.  This is good for today. Intermarket Technical analysis helps to understand the global markets, but we trust our signals and take action when they tell us.
The Sellerys.