Measuring Linkage by Thom Hartle
Seasoned traders know that relationships exist between markets. In theory, if fundamentals move one market in one direction, then another market may also move in the same direction or show a propensity to move in the opposite direction. These intermarket relationships are often referred to as linked markets. Can traders use this information? Indeed they can. Here are some ways.
Think about it. How many times have you glanced at the financial news headlines and read that the price action in one market was due to the movement in another? Probably fairly often. We've all seen headlines such as "Continued weakness in dollar worries bond traders," with the accompanying article supporting this explanation for a weak bond market, or a headline such as "Bond market rally boosts stock traders' confidence" explaining an up day in the stock market. Are such rationalizations justified? Is the explanation on target? Most of all, do these relationships between markets really exist? Well, the answer (to all) must be qualified with both a yes and a no. To clarify, first let's look
at some examples.