Implications For Technical Analysis

Technical analysis lias always had an inward focus. Emphasis was placed on a particular market to which a host of internal technical indicators were applied. There was a time when stock traders didn't watch bond prices too closely, when bond traders didn't pay too much attention to commodities. Study of the dollar was left to interbank traders and multinational corporations. Overseas markets were something we knew existed, but didn't care too much about.

It was enough for the technical analyst to study only the market in question. To consider outside influences seemed like heresy. To look at what the other markets were doing smacked of fundamental or economic analysis. All of that is now changing. Intermarket analysis is a step in another direction. It uses information in related markets in much the same way that traditional technical indicators have been employed. Stock technicians talk about the divergence between bonds and stocks in much the same way that they used to talk about divergence between stocks and the advance/decline line.

Markets provide us with an enormous amount of information. Bonds tell us which way interest rates are heading, a trend that influences stock prices. Commodity prices tell us which way inflation is headed, which influences bond prices and interest rates. The U.S. dollar largely determines the inflationaiy environment and influences which way commodities trend. Overseas equity markets often provide valuable clues to the type of environment the U.S. market is a part of. The job of the technical trader is to sniff out clues wherever they may lie. If they lie in another market, so be it. As long as price movements can be studied on price charts, and as long as it can be demonstrated that they have an impact on one another, why not take whatever useful information the markets are offering us? Technical analysis is the study of market action. No one ever said that we had to limit that study to only the market or markets we're trading.

Intermarket analysis represents an evolutionary step in technical analysis. Intermarket work builds on existing technical theoiy and adds another step to the analytical process. Later in this chapter, I'll discuss why technical analysis is uniquely suited to this type of investigative work and why technical analysis represents the preferred vehicle for intermarket analysis.

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