Something’s Gotta Give in the Intermarket Landscape

Jan 18, 2012: 11:42 AM CST

If you use Intermarket or Cross-Market Analysis in your trading or investment decisions, you’ve probably noticed something very strange over the last few months.

Let’s take a look at “What’s Going Wrong” from a classic Intermarket perspective which leads us to “What’s Gotta Give” in terms of a building reversal.

First, the closer perspective of five Cross-Market quick charts:

In terms of Cross-Market Analysis, it’s best to group the broad markets into four components:  Stocks/Equities, Bonds/Treasuries, Commodities, and Currencies.

This can be done in a number of ways using various Index symbols or popular ETFs.

From this, you can view various trends and then break each market down into individual components for clearer trading opportunities.

But for this post, I want to focus on the difference between “Risk-Off” Markets or defensive markets such as US Treasuries (Bonds) with the US Dollar Index and the “Risk-On” or offensive markets such as Commodities (Gold and Crude Oil above) and of course Stocks.

Risk-Off (defensive) and Risk-On (offensive) Markets tend to move opposite each other in terms of their trends… but that’s not what’s happening currently which warrants our attention.

In the line chart above, we see ALL markets (except for Gold) rising from the September or October lows to the current January highs.

In fact, these creeping uptrends leap off the charts at us, which brings us to the dilemma:

Why are all markets rising and what does it mean?

When will one or more of these markets reverse back to “normal?”

The answer is beyond the scope of this post but it merits further attention.

From a quick price perspective, here are the current resistance levels to watch:

  • 1,300 for the S&P 500
  • $103 for Crude Oil
  • $1,700 for Gold
  • 131 for 10-Year Notes
  • 81.50 in the US Dollar Index

Would it be possible for all markets to break above their respective resistance levels?  Yes, anything could happen, but that would be the lower-probability (and some would say “very unlikely”) outcome.

The classical thinking would be that either the Risk-On markets fail to overcome resistance and reverse lower, boosting Risk-Off assets above their resistance, or vice versa (Risk-Off Markets boost higher, reversing Risk-On Markets).

Here’s a longer perspective Cross-Market Line Chart from 2011 to present:

Watch these markets, as well as larger perspectives/timeframes, in the context of classical “Risk-On” and “Risk-Off” parameters.

Mark Douglas in his popular book Trading in the Zone reminds us that “Anything Can Happen” in the markets, but given the critical resistance levels and creeper (divergent) rallies into respective resistance, one has to assume that “Something’s Gotta Give (reverse)” soon.

Corey Rosenbloom, CMT
Afraid to

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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  • Geoff Coe

    Ah, what a good site!  I wish I could come to the trade expo, but I don't think I'll be able to.  Still, truly great trading blog. One of my top ten sites to visit (maybe even top 5.)

  • Jay

    How do you display multiple charts like that in StockCharts? Or did you photoshop them together?

  • Googsplat

    Excellent.  Fed and ECB is definitely distorting the long end of the curve on bonds, which would be showing much higher yields without their intervention.  Slowly, the money leaks back into equities.  So the bond bubble will deflate with logarithmic speed, while the equity bubble reinflates.  Already happening in tech, commodities. 

  • MutantDog

    I think (and have said before, elsewhere) that any America-only analysis of financial markets is bound to be incomplete in this global age. 

  • Ralphie

    Could it be because the market is no longer a tool to help companies grow and where value is based on how much money can be extracted by protracted means and High frequency computers that don't give a damn  or even know what a company is and the suckers are those who use logic ?

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