Tricks of the trade...Watching Intermarket Moves

by Greg Perlin and Michael Marshall

There are a lot of tricks and nuances to trading futures, and we believe watching moves in markets besides the one you are trading can be very informative. Technical indicators such as the MACD and moving averages can help at times, but are generally considered to be lagging indicators. We believe that some of the best directional indications come from watching correlated markets. For instance, if you want to trade gold, make sure you keep your eye on the crude oil market, the U.S. dollar, and the Dow Jones Industrial Average. See how these markets tend to move, and how gold behaves. Over time, we've seen a strong tendency for the U.S. dollar to trade conversely to gold; just pull up a chart and see for yourself how gold peaked above $800 an ounce as the U.S. dollar hit all-time lows against the euro.

The Japanese yen, in recent times, has also been another market to watch because of the carry trade. We believe the yen carry trade has been a strong factor in a lot of the recent movements we have seen in other futures markets. The yen carry trade is set in place when investors borrow yen at low interest rates, then turn around and place the "free money" in other investments. In many cases, these investors lend money to other nations for a higher interest rates in the form of purchased bonds.

Investors around the world have been participating in this carry trade, and some have been placing their bets on the strength in the euro. These traders might then sell yen, and buy euro futures. This cross-currency spread has been very interesting to watch because of its uncanny correlation to the U.S. stock market indices. This trade also places a lot importance on the Bank of Japan and the European Central Bank. If the BOJ were to raise interest rates even a quarter basis point, it could throw the whole carry trade out of whack, forcing many to liquidate positions in a number of markets. The same can be said for the ECB; if they chose to lower rates in an attempt to boost a slowing economy it could also force a liquidity squeeze.

Unfortunately, it is not as simple as buying the S&P or Dow futures, or commodities such as gold or silver, when the euro/yen looks strong. You have to be able to anticipate what might happen. That is where experience and knowledge can play a pivotal role. In these volatile times, it takes a savvy trader watching several markets at once to really get a feel for direction in any market.

Greg Perlin is a Senior Market Strategist with Lind Plus. He and Michael Marshall can be reached at 1-800-437-4189 or via email at gperlin@lind-waldock.com or mmarshall@Lind-Waldock.com.

Past performance is not necessarily indicative of future results. The trading of commodity interests entails the risk of substantial loss. Prospective investors should carefully read the Disclosure Document where applicable before making an investment decision.

*No representation is being made regarding the actual or hypothetical performance of the systems at any other brokerage firm or prior to the dates reflected above. These numbers include commissions, but not fees. Contrary to most published results, please note that these monthly returns are calculated based on closed trade profit/loss and do not include changes in open trade equity. Futures trading involves the substantial risk of loss and may not be suitable for all investors. Past performance is not necessarily indicative of future results. All information, including performance and program description, has not been reviewed or verified by Lind-Waldock.