The Visual Investor: How to Spot Market Trends, Second Edition

CHAPTER 7

Market Linkage

The visual—or charting—approach to investing has traditionally emphasized a single-market approach. A stock trader, for example, would study the price charts of the stock market or individual common stocks with little consideration of outside market influences. It was considered sufficient to study the price charts of the market in question along with its own set of internal indicators. The same attitude was true of traders in other asset classes. Bond traders studied bond charts, while commodity traders charted the commodity markets. Currency traders limited their chart work to the currencies they were trading. That is no longer the case. Chart analysis has taken a major evolutionary step over the last decade by emphasizing a more universal intermarket approach. I like to think that my book, Intermarket Technical Analysis (John Wiley & Sons, 1991) and its subsequent edition Intermarket Analysis: Profiting From Global Market Relationships (John Wiley & Sons, 2004) helped move things in that direction.

Some understanding of how the different asset classes interact with each other is important for at least two reasons. First, such an understanding helps you appreciate how other financial markets influence whichever market you’re interested in. For example, it’s very useful to know how bonds and stocks interact. If you’re trading stocks, you should be watching bonds (for reasons that will be explained later). If you’re a bond trader, you should be monitoring ...