9/22/2020 Intermarket Analysis Definition

TECHNICAL ANALYSIS TECHNICAL ANALYSIS BASIC EDUCATION

Intermarket Analysis
By CLAY HALTON | Updated Jul 24, 2019

What Is Intermarket Analysis?

Intermarket analysis is a method of analyzing markets by examining the correlations between
different asset classes. In other words, what happens in one market could, and probably does,
affect other markets, so a study of the relationship(s) could prove to be beneficial to the trader.

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KEY TAKEAWAYS
Intermarket analysis is a method of analyzing markets by examining the correlations
between different asset classes.
A simple correlation study is the easiest type of intermarket analysis to perform, where
results range from -1.0 (perfect negative correlation) to +1.0 (perfect positive
correlation).
The most widely accepted correlation is the inverse correlation between stock prices
and interest rates, which postulates that as interest rates go up, stock prices go lower,
and conversely, as interest rates go down, stock prices go up.

Understanding Intermarket Analysis

Intermarket analysis looks at more than one related asset class or financial market to determine
the strength, or weakness, of the financial markets, or asset classes, being considered.

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Instead of looking at financial markets or asset classes on an individual basis,

intermarket analysis looks at several strongly correlated markets, or asset classes, such as
stocks, bonds, currencies, and commodities. This type of analysis expands on simply looking at
each individual market or asset in isolation by also looking at other markets or assets that have
a strong relationship to the market or asset being considered.

For example, when studying the U.S. market, it is worthwhile to look at the U.S. bond market,
commodity prices, and the U.S. Dollar. The changes in the related markets, such as commodity
prices, may have an impact on the U.S. stock market and would need to be understood to
obtain a greater understanding of the future direction of the U.S. stock market.

Intermarket analysis should be considered fundamental analysis in that it relies more on

relationships to provide a general sense of direction, but, it is often classified as a branch of
technical analysis. There are different approaches to intermarket analysis, including
mechanical and rule-based.

Intermarket Analysis Correlations
Performing an analysis of intermarket relationships is relatively simple where one would need
data, widely available and free these days, and a spreadsheet or charting program. A simple
correlation study is the easiest type of intermarket analysis to perform. This type of analysis is
when one variable is compared with a second variable in a separate data set. A positive
correlation can go as high as +1.0, which represents a perfect and positive correlation between
the two data sets. A perfect inverse (negative) correlation depicts a value as low as -1.0.
Readings near the zero line would indicate that there is no discernible correlation between the
two samples.

Perfect correlation between any two markets for a very long period of time is rare, but most
analysts would probably agree that any reading sustained over the +0.7 or under the –0.7 level
(which would equate to approximately a 70 percent correlation) is statistically significant. Also,
if a correlation moves from positive to negative, the relationship would most likely be unstable,
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Inverse Correlation Definition

An inverse correlation is a relationship between two variables such that when one variable is high the
other is low and vice versa. more

Gap Analysis
Gap analysis is the process companies use to examine their current performance with their desired,
expected performance. more

Forex Training Definition

Forex training, broadly, is a guide for retail forex traders, offering them insight into successful strategies,
signals and systems. more

Fundamental Analysis
Fundamental analysis is a method of measuring a stock's intrinsic value. Analysts who follow this method
seek out companies priced below their real worth. more

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and probably useless for trading.

The most widely accepted correlation is the inverse correlation between stock prices and
interest rates, which postulates that as interest rates go up, stock prices go lower, and
conversely, as interest rates go down, stock prices go up.

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Related Terms
Understanding Positive Correlation
Positive correlation is a relationship between two variables in which both variables move in tandem.
more

Correlation Coefficient Definition

The correlation coefficient is a statistical measure that calculates the strength of the relationship between
the relative movements of two variables. more
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