ICT Mentorship - Lesson 3: Intermarket Analysis

Overview

• Focus on intermarket analysis using conceptual thinking.
• No charts presented; requires full attention and note-taking.
• Key idea: World markets are directly linked, with important correlations between various asset classes and sectors.
• Understanding these relationships aids in long-term analysis.

Four Major Groups of Intermarket Analysis

1. Bond and Interest Rate Markets
2. Commodity Markets
3. Stock Markets
4. Currencies Markets

• These groups are interconnected but not in lockstep.
• Lead and lag times exist in these market relationships, important for long-term analysis.

Benefits of Intermarket Analysis

• Simplifies the process without needing extensive fundamental data analysis (e.g., CPI, employment trends).
• Provides insights similar to those derived from fundamental data.

Relationships Between Major Groups

Bonds and Stocks

• Move together.
• Bond market rally (uptrend): Supports a bull market for stocks.
• Bond market bear trend: Hinders stock market rallies.
• Stock traders should monitor bond market as an indicator of underlying strength.

Commodities and Bonds

• Move oppositely.
• Bond prices up: Commodities down.
• Bond prices down: Commodities up.
• Inflation is often indicated by commodity prices.
• Long-term changes in trend take 6-12 months to manifest.

Currencies and Commodities

• USD vs. Commodities: Inverse relationship.
  • USD up: Commodities down.
  • USD down: Commodities up.
• Specific impacts on agricultural exports due to currency strength/weakness.
• Example indices: CRB Index, Goldman Sachs Commodity Index.

Bonds and Treasury Bond Yields

• Bond yields up: Commodities up.
• Bond yields down: Commodities down.

Bonds and Stock Market

• Positive correlation: Move in the same direction.
• Bond market up: Supports stocks.
• Bond market down: Bearish for stocks.
• Lead/lag time for trends: 6-12 months.
• Deflationary periods (e.g., late 1998): Bonds up, stocks/commodities down.

Key Intermarket Relationships

• Bullish USD Index: Bearish gold.
• Bullish gold: Bullish AUD/NZD (due to gold exports).
• Bullish oil: Bearish USD/CAD (Canada is a leading oil exporter).
• Bullish Dow: Bullish Nikkei Index.
• Bearish Nikkei Index: Bearish USD/JPY.
• Bearish yields: Bearish currency.
• Bearish gold: Bullish USD/CAD.

Conclusion

• Knowing these relationships helps in confirming long-term analysis and directional biases.
• Suitable for various trading styles (day trading, scalping, swing trading, long-term trading).
• Relationships reflect fundamental data trends without the need for extensive data analysis.
• Price movements in asset classes indicate underlying macro trends and fundamentals.
• Recommended to study and understand these relationships for effective market analysis.

Quote: "The information in this is worth its weight in gold." - Presenter