Recently, I wrote an article on intermarket analysis where I explained how all markets are somehow related to other markets. I referenced the book “Intermarket Analysis” by John Murphy, and it is from this book that I will draw the 7 tips or advice from John Murphy for traders in any market—whether it be stocks, futures, commodities, regardless of the market you trade, this article is for you.
Let’s start by recapping the concept of intermarket analysis, which:
“is the study of how various financial markets are related to one another.”
By operating exclusively by looking at the chart of the asset you are trading, you leave very important information on the table, as many early signals are given by other markets that influence the direction of the market you are trading.
ETFs as Allocation Strategy
John Murphy was not the first person to observe correlations in markets and apply intermarket analysis, but he is today considered the foremost reference in this area. He emphasizes how ETFs can help you in asset allocation using intermarket analysis and in sector rotation strategies. Throughout this book, John Murphy gives tips, and I want to share some here with you.
But first, I want to invite you to open an account with BTG Pactual, a partner of the channel. You can get the Profitchart Pro platform for free if you execute a minimum number of orders in the mini-index and mini-dollar market, and everything you will see in this intermarket lesson, you can apply in day trading in mini-futures contracts. So, open your BTG account now.
1st Tip
The first tip from John Murphy that I selected is:
“Commodity prices and foreign currencies tend to move in the same direction but in the opposite direction to the US dollar.”
He shows that the dollar’s peak in 2002 helped in the rise of commodity prices.
2nd Tip
Another tip from John Murphy is that
“Bonds (which are fixed-income securities) usually change direction first at the tops and bottoms, stocks turn second, and commodities third. This knowledge will help you determine where to be in different stages of the business cycle. It will also help you determine if the business cycle is growing or contracting.”
So, you realize that intermarket analysis goes far beyond saying that if the mini-dollar is falling, the mini-index is rising; if they both move together, one of them is lying. We also get early signals of a turn in all markets. In this case, bond prices signal the turn first, followed by stocks, and lastly, commodities.
3rd Tip
The third tip is related to oil, which is the most important commodity globally, and I covered this well in the introductory article on intermarket analysis.
“The rise in oil prices usually forces the Fed to raise interest rates, which weakens the stock market and slows down the economy.”
In other words, imagine that oil is rising, the prices of many goods go up, then the Federal Reserve, which is like the American central bank, aiming to contain inflation, will raise interest rates, and this will weaken the stock market, as fixed income becomes more attractive.
So, the opportunity cost of taking risks instead of simply receiving interest is high, and then we see with the fall of the stock market a slowdown in the economy, which contains inflation.
4th Tip
Another tip:
“While stocks usually change direction before the economy, bonds usually change direction before stocks. This makes bonds an even earlier economic indicator than stocks.”
5th Tip
The fifth tip I selected from John Murphy, this one is well-known, even Martin Pring has given this tip, is that:
“Technical analysis can be applied to any market and type of asset, both for short-term trading and long-term investments.”
The market has a fractal nature, so all principles of technical analysis apply to any time horizon. And technical analysis is the most efficient way to perform intermarket analysis. So, I can even do this analysis just by looking at the quotes;
If the dollar is rising today, then I imagine the mini-index will fall, but when I analyze the charts of each of these assets and observe the progression of tops and bottoms, that’s where I get early signals. So, let’s say I’m about to enter a long trade on the mini-index but I see the dollar forming a bullish pattern, it’s dangerous to go long on the mini-index if the dollar is setting up a bullish pattern.
Better stay out of the operation. Now, you don’t open a trade in one asset just because another asset moved in one direction. The technical analysis trader wants to see a pattern on the chart they are trading, but they gather more evidence by looking at assets correlated with it, using intermarket analysis.
6th Tip
The next tip from John Murphy is that:
“A rising dollar causes commodity prices to fall. Falling commodity prices usually produce higher bond prices.”
In the book, he shows several examples, but I can’t show much here due to copyright.
7th Tip
The seventh tip is:
“Gold and oil prices usually rise during times of crisis and fall when the crisis passes.”
Gold, everyone knows, is a store of value that in times of crisis is a good option to preserve your wealth. But John Murphy shows in the book that oil prices also generally rise during times of crisis.
8th Tip
Which leads us to tip 8, which is related:
“Transportation sector stocks are especially vulnerable to rising oil prices because of the sector’s heavy dependence on fuel.”
9th Tip
Another tip he gives is to look at an important commodity index. Every time we mentioned commodities here, if you read this book, you will see him giving graphical examples in the:
“CRB index, which is a basket of 19 actively traded commodity markets and the oldest measure of commodity price trends.”
10th Tip
Tip number 10 is that:
“During financial panics, investors often pull money out of stocks and put it into US Treasury bonds, considered one of the safest investments in the world.”
We have several fixed-income investments that during times of panic will attract investors, but the safest of all will always be the government’s, as companies can go bankrupt much easier than governments.
11th Tip
The next tip is that:
“Bond yields tend to move in the same direction as commodity prices.”
12th Tip
Tip number 12:
“A correlation between two markets can be positive or negative. A positive correlation means two markets tend to move in the same direction. A negative correlation means they tend to move in opposite directions.”
13th Tip
Tip number 13:
“Most stock market tops have been caused by the Fed raising short-term rates to contain rising oil prices.”
So, if oil spikes, it’s a warning that at any moment a move by the Federal Reserve could result in capital leaving the stock market.
14th Tip
Tip number 14:
“When oil prices are rising, energy-related stocks usually become stock market leaders.”
So, with this information in hand, you know that if oil forms a bullish pivot on the weekly chart, you can start looking at energy stocks. Remember, this is not an investment recommendation from me; it’s a tip from John Murphy, and sometimes correlations break, nothing works 100% of the time. When in doubt, stay out.
15th Tip
Tip number 15 is about the powerful 200-period moving average. There is a video on the channel about the importance of the 200-day moving average, and John Murphy says:
“A turn in the 200-day moving average is usually a warning of a more serious market decline.”
To understand better, watch my video on John Murphy’s 15 tips:
-> Check out the video:
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