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LostAndFound-video-6.srt

Last modified by Drunk Monkey on 2022-11-10 06:39

Outline

00:02 - Progress at the Barley Trust Bank.

01:28 - The concept of “inter-market analysis”.

03:29 - The fourth and last asset class is the US Dollar.

05:27 - The intermarket relationships depend on the forces of inflation.

07:26 - What does that look like in a chart?

10:31 - The inverse relationship between the US dollar and the commodity market.

12:16 - The relationship between the S&P and bond market during the inflationary period.

13:34 - The US Dollar Index with the CRB Index.

15:26 - What is a sine wave chart?

18:20 - Technical analysis is a double-edged sword for traders.

Transcription

1 00:00:02,730 --> 00:00:21,900 ICT: possible to a little bit of progress at the barley Trust Bank oil rich we have ShotSpotter boiled down by automatic get the officer up.
2 00:01:28,890 --> 00:01:39,000 Okay folks, you're going to be covering some major market analysis type concepts and techniques. And I believe this should be the origin of any effective top
3 00:01:39,000 --> 00:01:44,700 down analysis. And we're going to be basically introducing is the concept of inter market analysis.
4 00:01:50,640 --> 00:02:04,680 No, since I've been active on the internet sharing insights and concepts that I've personally traded with for over 16 years now, I get asked a lot basically,
5 00:02:04,680 --> 00:02:14,010 what was the major milestones are concepts that I learned that really made a dramatic impact on my technical analysis as a trader, and the one I go to first
6 00:02:14,010 --> 00:02:22,710 and foremost and is the single most influential concept was the one of inner market analysis. Inner mount inner market analysis is a branch of technical
7 00:02:22,710 --> 00:02:32,580 analysis that examines the correlations between four major asset classes and those being stocks, bonds, commodities and currencies. In his classic book on
8 00:02:32,580 --> 00:02:41,070 inter market analysis, John J. Murphy, he notes that traders can use these relationships to identify the stage of business cycle and improve their
9 00:02:41,070 --> 00:02:50,070 forecasting abilities. There are clear relationships between stocks and bonds and bonds to commodities and commodities and the US dollar. And by knowing these
10 00:02:50,070 --> 00:02:59,340 relationships and correlations, these can help the Chartist or technical traders like we as forex traders, to determine the stage of the investing cycle, in a
11 00:02:59,340 --> 00:03:07,890 market analysis turned my once mediocre technical analysis into consistently informed trading, enabling me to see the big picture and not simply the price
12 00:03:07,890 --> 00:03:20,220 action or whatever particular asset I was trading at the time. Or the market in fourths. We've already mentioned briefly that there's four major market asset
13 00:03:20,250 --> 00:03:31,770 classes that go along with major market analysis, those four groups being domestic and foreign bond and or interest rates. And simply because I base a lot
14 00:03:31,770 --> 00:03:40,770 of my trading on the US dollar and US Treasury market, we're going to be referring to the 30 year treasuries, the 10 year treasuries, two and five year
15 00:03:40,770 --> 00:03:50,700 treasuries, etc. Obviously, it's not limited to just this there will be discussion on foreign bond and interest rate asset classes that we'll cover
16 00:03:50,730 --> 00:04:01,110 later on in the series that we're sharing now, but moving on to second asset classes, the stock and or equities, markets, that would be the Dow stocks the
17 00:04:01,140 --> 00:04:12,210 s&p 500 stocks, the NASDAQ stocks, etc. commodities and futures. And whenever referring to commodities, we always want to first look at the CRB Index, which
18 00:04:12,210 --> 00:04:22,590 is basically the barometer for commodities as a whole if the CRB Index is trending up, that is, by and large, the indication that you should be looking
19 00:04:22,590 --> 00:04:31,800 for buy signals in the commodity markets. And obviously, conversely, if the CRB Index is trending lower, you want to be looking for sell signals in the futures
20 00:04:31,800 --> 00:04:40,680 and commodities markets. Commodity Markets are broken into basically the agricultural and financial and I'm not going to refer to the debt instrument
21 00:04:40,680 --> 00:04:51,360 because we already mentioned that in the A section. Obviously, the last and most important to us as forex traders is the currency asset class and it's broken
22 00:04:51,360 --> 00:05:01,050 into the US Dollar as the benchmark to weigh all other currencies. And one could still argue about that and considering the strength of It is right now. But
23 00:05:01,050 --> 00:05:09,570 that's not what the comp is gonna be for this moment. But the US dollar and the foreign currencies is the fourth and last asset class that we have to contend
24 00:05:09,570 --> 00:05:23,280 with when we do major market analysis. All right, when we look at all these four assets, asset groups, okay, there's two environments that we have to work within
25 00:05:23,640 --> 00:05:32,670 and that is an inflationary environment and a deflationary environment. The intermarket relationships depend on the forces of inflation and or deflation. In
26 00:05:32,670 --> 00:05:42,480 a normal inflationary environment, stocks and bonds are positively correlated, that means they're going to trend together if they if the bond market trades up,
27 00:05:42,720 --> 00:05:55,140 the stock market will be trading up in sympathy with it. The market if it trades, lower in the bond market, stocks will trade lower. If the bond market
28 00:05:55,140 --> 00:06:02,970 trades higher, stocks will trade higher so they're positively correlated. Now, this means they both move in the same direction obviously, but the world was in
29 00:06:02,970 --> 00:06:13,590 an inflationary environment from the 1970s to the late 1990s. And these key in the market relationships are found in an inflationary environment, a positive
30 00:06:13,620 --> 00:06:23,460 relationship or correlation between bonds and stocks. An inverse relationship between interest rates and stocks. Bonds usually change direction ahead of
31 00:06:23,490 --> 00:06:34,350 stocks, an inverse relationship between commodities and bonds. A positive relationship or correlation between commodities and interest rates, a positive
32 00:06:34,350 --> 00:06:44,340 relationship or correlation between stocks and commodities, commodities usually changed directions after stocks and an inverse relationship or correlation
33 00:06:44,340 --> 00:06:55,590 between the US dollar and commodities. In an inflationary environment, stocks react positively to a falling interest rate. Which basically translates in our
34 00:06:55,680 --> 00:07:04,620 technical charts as rising bond prices. So the bond market will be rallying on your chart for this instance. Now low interest rates stimulate economic activity
35 00:07:04,620 --> 00:07:13,170 and boost corporate profits as interest rates fall and the economy strengthens, demand for commodities increases and commodity prices rise. Now keep in mind
36 00:07:13,170 --> 00:07:21,330 that an inflationary environment does not always mean runaway inflation. It just simply means that inflationary forces are stronger than the deflationary forces.
37 00:07:26,970 --> 00:07:37,050 Okay, so what does that look like and translate into a chart? What we're looking at here the higher chart on the upper half of this depiction is the 30 year
38 00:07:37,050 --> 00:07:50,400 treasury bond. And the lower portion is the s&p 500 cash index. You can see during inflationary periods that the bond market and stocks rally together until
39 00:07:50,700 --> 00:07:59,700 we get to the late part of 1998. And the fall more there was a major decoupling between stocks and bonds, and we entered into a deflationary period, we can
40 00:07:59,700 --> 00:08:16,110 still see that stocks rallied but the bond market was now trending lower. So there was an inversion the secondary environment we had to contend with as
41 00:08:16,350 --> 00:08:25,440 traders is the deflationary environment. Now obviously deflationary forces changed the whole dynamic. Deflation is negative for stocks and commodities, but
42 00:08:25,440 --> 00:08:35,520 positive for bonds. A rise in bond prices and fall in interest rates increases a deflationary threat, and this puts downward pressure on stocks. Conversely, a
43 00:08:35,520 --> 00:08:46,110 decline in bond prices and rise in interest rates decreases the deflationary threat and this is a positive for stocks. The list below summarizes the key
44 00:08:46,110 --> 00:08:56,010 intermarket relationships during deflationary environments, there is an inverse correlation or relationship between bonds and stocks, one will go up while the
45 00:08:56,010 --> 00:09:05,340 other goes down. There's a positive relationship between interest rates and stocks. There's an inverse relationship or correlation between commodities and
46 00:09:05,340 --> 00:09:14,640 bonds. A positive relationship or correlation between commodities and interest rates, a positive correlation or relationship between stocks and commodities,
47 00:09:14,970 --> 00:09:18,300 and an inverse relationship between US dollar and commodities.
48 00:09:25,500 --> 00:09:34,140 While the dollar and currency markets are part of the inter market analysis, the dollar is a bit of a wildcard. As far as stocks are concerned, a weak dollar is
49 00:09:34,140 --> 00:09:42,210 not bearish unless accompanied by a serious advance in commodity prices. Now obviously a big advance in commodities would be a bearish for bonds, but by
50 00:09:42,210 --> 00:09:52,050 extension, a weak dollar is also generally bearish for bonds. A weak dollar acts as an economic stimulus by making us exports more competitive. So what are the
51 00:09:52,050 --> 00:10:00,570 effects of a rising dollar? While a country's currency is a reflection of its economy and its national balance sheet countries with strong economies In strong
52 00:10:00,570 --> 00:10:09,210 balance sheets have stronger currencies. Countries with weak economies and big debt burdens are subject to weaker currencies. A rising dollar puts downward
53 00:10:09,210 --> 00:10:17,250 pressure on commodity prices, because many commodities are priced in dollars, such as oil for example, bonds benefit from a decline in commodity prices
54 00:10:17,250 --> 00:10:25,500 because this reduces inflationary pressures. Stocks can also benefit from a decline in commodity prices, because this reduces the cost for raw materials.
55 00:10:31,590 --> 00:10:47,190 We can see the inverse relationship between the US dollar and the commodity market viewed by the CRB Index. Note that there is a negative correlation or an
56 00:10:47,190 --> 00:10:59,640 inversion between the two when the green line which is the US dollar, if it rallies up, typically what you'll see commodities, they'll trade lower, at some
57 00:10:59,640 --> 00:11:13,290 point there will be a transfer and shift in the marketplace. And just like I teach with the correlation study between the fiber and cable in forex that
58 00:11:13,290 --> 00:11:28,170 you've learned so far on baby pips.com. This also takes place in the dollar and CRB Index, when one makes higher highs and the other fails make lower lows, that
59 00:11:28,170 --> 00:11:37,230 is an indication that there's a major shift underway. And we have to be mindful that and you can see that take place in 2002. Note that the dollar was making
60 00:11:37,230 --> 00:11:47,310 higher highs, but two CRB Index was failing to make lower lows, that is a major market divergence. When you see these events take place and correlated or
61 00:11:47,310 --> 00:12:00,150 inversely correlated. market indices is a tip off that there is a shift on a major macro level, that there's something happening, we don't need to know
62 00:12:00,150 --> 00:12:10,020 exactly what it is. And we may be you gleaning insight from market reports and fundamental data if you're really into that. But what we're sharing in this
63 00:12:10,020 --> 00:12:20,700 presentation is about the extent I go with fundamental analysis, but I look at the larger macro view. And by doing that, the title the major market level, and
64 00:12:20,700 --> 00:12:25,500 then we can get ourselves poised to trade within that trend or flow.
65 00:12:32,820 --> 00:12:45,990 Okay, here's the relationship between the s&p and bond market and during the inflationary period, obviously, we've already learned that bonds and stocks will
66 00:12:45,990 --> 00:12:57,390 move together. And then there was a decoupling that took place. And there was an inversion where stocks continue to rally while the interest rate market started
67 00:12:57,390 --> 00:13:13,350 the trade off into 2000. And then we had another coupling between the two in 2003. A little bit and then obviously s&p stock market continued to trade up
68 00:13:13,350 --> 00:13:26,580 higher into 2007 fall and then we've basically traded down and then we went into a higher interest rate, lower stock environment as well.
69 00:13:34,770 --> 00:13:49,980 Okay, we can see the US Dollar index with the CRB Index you can see now clearly, when the dollar surges, the CRB or commodities plunge, and beginning of this
70 00:13:49,980 --> 00:14:01,740 year 2011 defined with this presentation, we saw that the dollar was slipping lower in which was a catalyst for precipitous price advances in the commodity
71 00:14:01,740 --> 00:14:17,040 market, which was also a reason why if you've been following the thread on baby pips.com hinted at one of the mega trades that typically happen. There's few of
72 00:14:17,040 --> 00:14:29,340 them happen every year, but we called a major rally in the Swiss franc. Based on this analysis here. The dollar was poised to go lower, and the CRB Index was
73 00:14:29,670 --> 00:14:40,380 really poised to trade higher. Everything was in sync for foreign currencies to move up. And the Swiss franc had everything in its favor to be going higher. And
74 00:14:40,380 --> 00:14:51,390 if you look at your charts for the year of 2011, the Swiss franc was an outstanding performer on the upside. And all that analysis was shared on the
75 00:14:51,390 --> 00:15:04,140 thread with the open interest factors that we talked about and techniques. And you can see how all that was Really hinging on this analysis concept that you're
76 00:15:04,140 --> 00:15:17,160 learning here, the macro economic view, the long term macro view, long term analysis trading down into a more immediate term top down analysis that we'll
77 00:15:17,160 --> 00:15:21,000 learn more about in subsequent presentations.
78 00:15:26,250 --> 00:15:43,230 Okay, this is a standard business cycle. Okay, and the chart is actually been shown in a sine wave chart. And basically it's a it's a cycle that shifts in and
79 00:15:43,230 --> 00:15:55,440 out in the marketplace. And the business cycle shown here is depicted by the first three stages are part of an economic contraction, which is weakening and
80 00:15:55,440 --> 00:16:07,290 bottoming and strengthening, then stage three shows the economy in a contraction phase with strengthening after a bottom, in a sine wave crosses the center line.
81 00:16:07,290 --> 00:16:16,320 In other words, we get halfway through the chart. This depicts the economy moving from contraction to the three phases of economic expansion, which is
82 00:16:16,710 --> 00:16:26,340 referred to as strengthening in the market with old tarp top off and then start to weaken. And then stage six of the business cycle shows in our economy in an
83 00:16:26,340 --> 00:16:36,900 expansion phase, but weakening after a market top. More specifically, let's go through each stage. Stage one shows the economy contracting and bonds turning up
84 00:16:36,930 --> 00:16:47,070 as interest rates begin to decline. economic weakness favors loose monetary policy and the lowering of interest rates, which is bullish for bonds. Stage two
85 00:16:47,640 --> 00:16:56,310 marks a bottom in the economy and the stock market. Even though economic conditions have stopped deteriorating, the economy is still not in an expansion
86 00:16:56,310 --> 00:17:07,170 stage, or actually growing. However, stocks anticipate an expansion phase by bottoming before the contraction period ends. Stage three shows a vast
87 00:17:07,170 --> 00:17:16,050 improvement in economic conditions as the business cycle prepares to move into an expansion phase. Stocks have been rising commodities now anticipate an
88 00:17:16,050 --> 00:17:25,710 expansion phase by turning up. Stage four the business cycle marks a period of full expansion, both stocks and commodities are rising but bonds turn lower.
89 00:17:25,950 --> 00:17:35,940 Because the expansion increases the inflationary pressures, interest rates start moving higher to combat inflationary pressures. Moving on to stage five. This
90 00:17:35,940 --> 00:17:44,820 marks a peak and economic growth and the stock market. Even though the expansion continues, the economy grows at a slower pace. Because rising interest rates and
91 00:17:44,820 --> 00:17:54,210 rising commodity prices take their toll. Stocks anticipate a contraction phase by peaking before the expansion actually ends. Commodities remain strong and
92 00:17:54,210 --> 00:18:03,900 peak after stocks. stage six marks a deterioration in the economy. As the business cycle prepares to move from expansion phase to contraction phase,
93 00:18:04,140 --> 00:18:13,110 stocks had already been moving lower and commodities now turn lower in anticipation of decreased demand for deteriorating economy. Now keep in mind
94 00:18:13,110 --> 00:18:23,310 this is the ideal business cycle in an inflationary environment. Stocks and bonds advanced together in stage two and three. Similarly, both declined in
95 00:18:23,340 --> 00:18:30,630 stages five and six. This would not be the case in a deflationary environment when bonds and stocks move in opposite directions.
96 00:18:36,270 --> 00:18:44,580 So disappointing all this right. Well, technicians, and those who trade on technical analysis rely on price charts to give them directional probabilities
97 00:18:44,580 --> 00:18:53,820 for the trade decisions. However, good to traders technicals may be it never hurts to understand monetary policy, macro economics and the general market tune
98 00:18:54,270 --> 00:19:02,730 your best periods of trading be it Stocks, Futures bonds, and even Yes, forex will come when you are in sync with the macro economic environment and your
99 00:19:02,730 --> 00:19:10,950 strong technical analysis, you will have a double edged sword, the highest probable fundamental trends with the highest probable technical trends make
100 00:19:10,950 --> 00:19:19,710 ridiculous returns for the savvy trader. Learn to buy high risk asset class vehicles, such as stocks, commodities and foreign currencies, when risk is on
101 00:19:19,950 --> 00:19:29,370 and the US dollar is weak. Conversely, short high risk asset class vehicles when the US dollar is strong. By doing this, you step the odds up considerably in
102 00:19:29,370 --> 00:19:42,120 your favor as a trader. And isn't that what this is really about trading with high odds of success? It's enclosing points to consider looks I know this is
103 00:19:42,120 --> 00:19:51,900 very dry information. However, it's very useful insight into long term success. It's not always just about entry and exit point tactics. We want to be trading
104 00:19:51,930 --> 00:20:00,480 with the major market tied on our side and this is the first step to grasping that understanding on how precisely we do that in our market and out process is
105 00:20:00,480 --> 00:20:09,450 a valuable tool for long term medium term analysis. While these intermarket relationships generally work over longer periods of time, they are subject to
106 00:20:09,450 --> 00:20:19,110 draw downs or periods when the relationships do not work. Big events such as Euro crisis and the US financial crisis can throw a certain relationship out of
107 00:20:19,110 --> 00:20:26,820 whack for a few months. Furthermore, the tool shown in this presentation should be used in conjunction with other technical analysis techniques. It should be a
108 00:20:26,820 --> 00:20:35,490 part of a basket of broad market study designed to assess the overall strength or weakness of the market. One indicator one relationship should not be used on
109 00:20:35,490 --> 00:20:47,580 its own to make a sweeping assessment of market conditions, we must be aware of the whole market to be better informed as traders. If you want to learn more
110 00:20:47,580 --> 00:20:58,080 about this topic, and if you have more questions, the two most important books, in my opinion are by John J. Murphy in a market analysis profiting from global
111 00:20:58,080 --> 00:21:06,030 market relationships, and his book The visual investor, how to spot market trends. If you don't have these books in your library, I suggest you get it and
112 00:21:06,210 --> 00:21:12,960 you're gonna glean some really good insight and much more greater detail than I can go through with this presentation. my highest recommendation for both of
113 00:21:12,960 --> 00:21:13,530 these books