I will be starting a series on Inter-market Analysis, a major concept first introduced by John Murphy, and in later years popularized by Ashraf Laidi as well as Kathy Lien.
With some effort, their ebooks can be found online for free. Check out the bibliography at the end of this article for their full title.
Understanding inter-market connections can be of great help especially to swing/positional traders who operates between a myriad of charts. It can increase conviction of a trade direction if multiple charts were to suggest a particular inter-market concept in tandem.
In the 1st part of this series, I will elaborate on how the concept of risk on risk off , has helped to increase my trade conviction. I will illustrate this using the direct correlation between the leader of global stock market , Dow Jones Index vs AUDJPY, one of the Japanese Yen forex currencies. Finally I also bring in the Nikkei chart to show how global markets could be topping out soon, and shorting maybe easier for swing traders in the shorter term future.
1. In general, if the stock market is bullish, the JPY crosses will be bullish as well.
2. I focus on AUDJPY because it is also known as the risk barometer.
The Aussie Dollar (AUD) is a commodities dollar (comdoll) which represents risk due to its higher +ve swap collected if a long position was to be taken on it.
On the other hand the Japanese Yen (JPY) is seen as a currency which suggests ‘stability’ and ‘limited growth’.
Therefore putting these 2 currencies together reflects a broader market sentiment of either optimistic or pessimistic. If technical charts of Dow Jones and AUDJPY were to suggest being in similar market cycles, then it is likely that the forecast for the markets will be imminent and true.
For week50, my hypotheses is that global market is turning bearish. Let us take a look at AUDJPY first:
This chart paints a story of overwhelming confluences that on hindsight the short was inevitable. However this was not a captain hindsight analysis. Earlier on the short trade has been documented:
Dow Jones did not suggest a bearish trend as strong, nor as clear as AUDJPY. However it does reflect a strong resistance from the top. There were many months of ranging at the top. In the past few days, a 2 month double top had been completed as well.
This chart is done with 2 objectives:
1. to conclude that market has turned bearish but the Japanese stock market is the frontrunner, ahead of AUDJPY and Dow Jones, since mid Nov.
2. This is not a captain hindsight analysis but forecast had given out since dec8:
With sufficient practice, technical charting can be a very good tool to profit from the market.
1.With 3 charts pointing to the bearish move kicking off already, it is therefore better to be on short side for the markets / jpy crosses. Longs will be considered countertrend .
2. Swing traders may find it beneficial to move between charts but the cons of it will be the tendency to get lost in all the charts. One way to sort out the charts can be based on the existing intermarket correlation.
I will therefore trade on themes, and not just currencies per se.
eg. risk-off -> Dow , s&p , nikkei , audjpy etc.
I do not restrict myself to : AUDjpy , AUDUSD , AUDSGD etc
or cadJPY, gbpJPY etc.
If you have found this useful, do share with your friends. For the next part on this series, I will be touching on metals.
useful books for Intermarket analysis:
Murphy, John J. Intermarket Analysis: Profiting from Global Market Relationships. Vol. 115. John Wiley & Sons, 2011.
Laïdi, Ashraf. Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets. Vol. 434. John Wiley & Sons, 2008.
Lien, Kathy. Day trading the currency market: Technical and fundamental strategies to profit from market swings. Vol. 260. John Wiley & Sons, 2006.