Before we begin to study the individual relationships, I'd like to lay down some basic premises or guidelines that I'll be using throughout the book. This should provide a useful 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 are an infinite number of relationships that exist between markets, but our discussions will be limited to those that I have found most useful and that I believe carry the most significance. After completion of the overview contained in this chapter, we'll proceed in Chapter 2 to the events of 1987 and begin to approach the material in more specific fashion. These, then, are our basic guidelines:
1. All markets are interrelated; markets don't move in isolation. 2. Intermarket work provides important background data. 3. Intermarket work uses external, as opposed to internal, data. 4. Technical analysis is the preferred vehicle. 5. Heavy emphasis is placed on the futures markets. 6. Futures-oriented technical indicators are employed.
These premises form the basis for intermarket analysis. If it can be shown that all markets— financial and nonfinancial, domestic and global—are interrelated, and that all are just part of a greater whole, then it becomes clear that focusing one's attention on only one market without consideration of what is happening in the others leaves one in danger of missing vital directional clues. Market analysis, when limited to any one market, often leaves the analyst in doubt. Technical analysis can tell an important 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 related market may provide critical information as to market direction. When in doubt, look to 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 this book.
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