The Power of Intermarket Analysis

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I've seen a lot of terrific charting here at Slope.  Everyone has their favorite indicators and methods, which taken together usually tell the story with reasonable accuracy.  My personal favorite (which I don't see a lot of unfortunately) is the intermarket spread, or ratio, chart.  When the market makes a powerful move or takes out a key level, we're all trained to look for confirmation.  Whether it's volume or your favorite momentum oscillator, we need tools to tell us whether a lower low is going to stay that way or is in fact ripe for reversal.  Spread charts are an awesome ancillary indicator that I don't see chartists use enough.  Part of what's cool about them is the securities observed can be customized to fit the focus of traders at a particular moment.

Take the recent breakdown in equities, for example.  Just about anyone could have told you that stocks were going to sink or swim based on whatever came out of Europe.  I saw plenty of charts linking FXE to the trend in US stocks, but I was intently focused on FEZ; the Euro Stoxx 50 ETF.  More importantly, its performance relative to SPY.  If Europe was the anchor, we weren't going to see a sustainable low until European equities put up a fight.  So when the S&P took out 1100 with force to begin October, the fact that we didn't get confirmation on the following chart was alerting to me.

Sure enough, the move lacked momentum and we a got a whopper of a reversal.  Some were focused on the fact that fewer individual stocks were making new lows or that MACD, McClellan, etc. were failing to confirm.  Others like Tim just had the right instincts that we were likely to get some relief after traveling so far down so fast.  These spread charts are just another tool in the toolbox, and I think they capture the subtext of the market better than anything else.

At the moment, stocks are working on a 12% sprint in just a week's time following the 1075 low.  But if this was the real thing–a true end to the bear cycle–I'd expect to see small caps (IWM), emerging markets (EEM), and financials (XLF) all getting up off the canvas relative to the broad market.  Have some fun and run the charts, and I'm sure you'll feel much better about taking profits if you bought this move or shorting if you've been waiting to pounce.

by Brian Thomas for