Emphasis On The Futures Markets

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Intermarket awareness parallels the development of the futures industry. The main reason that we are now aware of intermarket relationships is that price data is now readily available through the various futures markets that wasn't available just 15 years ago. The price discovery mechanism of the futures markets has provided the catalyst that has sparked the growing interest in and awareness of the interrelationships among the various financial sectors.

In the 1970s the New York commodity exchanges expanded their list of traditional commodity contracts to include inflation-sensitive markets such as gold and energy futures. In 1972 the Chicago Mercantile Exchange pioneered the development of the first financial futures contracts on foreign currencies. Starting in 1976 the Chicago exchanges introduced a new breed of financial futures contracts covering Treasury bonds and Treasury bills. Later on, other interest rate futures, such as Eurodollars and Treasury notes, were added. In 1982 stock index futures were introduced. In the mid-1980s in New York, the Commodity Research Bureau Futures Price 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. After 1986, however, traders could pick up a chart book to include graphs on virtually eveiy market and sector. They could see right before their eyes the daily movements in 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 the minute-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 that these 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 various overseas equities, in particular the British and Japanese stock markets. As various financial futures contracts began to proliferate around the globe, the world suddenly seemed to grow smaller. In no small way, then, our ability to monitor such a broad range of markets and our increased awareness of how they interact derive from the development 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 be on the futures markets. Since the futures markets cover every financial sector, they provide a useful framework for our intermarket work. Of course, when we talk about stock index futures and bond futures, we're also talking about the stock market and the Treasury bond market as well. We're simply using the futures markets as proxies for all of the sectors under study.

Since most of our attention will be focused on the futures markets, I'll be employing technical indicators that are used primarily in the iutures markets. There is an enormous amount of overlap between technical analysis of stocks and futures, but there are certain types of indicators that are more heavily used in each area.

For one thing, I'll be using mostly price-based indicators. Readers familiar with traditional technical analysis such as price pattern analysis, trendlines, support and resistance, moving averages, and oscillators should have no trouble at all.

Those readers who have studied my previous book, Technical Analysis of the Futures Markets (New York Institute of Finance/Prentice-Hall, 1986) are already well prepared. For those newer to technical analysis, the Glossary gives a brief introduction to some of the work we will be employing. However, I'd like to stress that while some technical work will be employed, it will be on a very basic level and is not the 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. You should 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 in the futures markets is that they make comparison with related markets, particularly overseas markets, much easier. Stock market work, as it is practiced in the United States, is very heavily oriented to the use of sentiment indicators, such as the degree of 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 needed to determine sentiment readings, the price-oriented indicators I will be employing lend themselves more readily to intermarket and overseas comparisons.

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