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Know what is going on in the Futures market!!!

March 8, 2009 Equity Trading 2 Comments

Excerpt from John Murphy’s (1997? ) seminar, Applying Technical Method to Today’s Trading.


For those of you that trade the futures markets, there are a lot of other things outside the future markets that you should be following. But, I guess my bigger message is… for those of you that aren’t in the futures markets, whether you trade them or not, the futures markets have a tremendous impact on what happens in the other markets.


I keep pointing out to the Wall Street crowd for example, that if you’re going to trade stocks, you have to know what’s happening in the futures markets, because they affect inflation, they affect interest rates, they affect stock groups, and they play a tremendously important part in the whole financial spectrum.”


Link:  John Murphy’s seminar, Applying Technical Method to Today’s Trading.
You can watch all 90-minutes of it for free at Ino.com (link above)

In this 90-minute video, veteran market analyst John Murphy explains how he looks at the markets using non- traditional methods. Using sector rotation, John will guide you through his thought process in selecting markets to trade. You will also get to see John`s intermarket analysis in action and just how commodities can put a drag or a rocket under a stock. John further explains the relationship between the U.S. Dollar and Gold prices.

Topics (and my notes) –

  • John Murphy: Started off in stocks, then futures, then back to stocks.
  • A Different Approach
  • March Bonds: First half of 1996, prices went down. Around May, it went up. 200DMA – good indicator of trends. Generally see a weak first half and a strong second half.
  • CRB Index: Commodity Index. Commodities do move in trends. In the first half of 1996, commodities were strong. However, in the second half of the year, starting in May, it was weak. This chart is the reverse of the Bonds chart. In general, commodity prices and bond prices tend to move in opposite directions. For example, commodities up, bonds down.
  • Leading Indicator:  Commodities are a leading indicator (warning sign) of inflation. When commodity markets get to high in price, typically, there are concerns that the Fed will raise interest rates. If you are a bond trader or are just interested in tracking interest rates, you must know what is going on in the commodity pits. The normal relationship is that bonds and commodities should move in the opposite direction.
  • Ratio Chart: Relative Strength Chart. Dividing the CRB Index by the Bond Prices. When the line goes up, commodity prices are outperforming bonds. To trade the spread, long commodities and short bonds. In May, you want to do the opposite. This ratio is a good economic indicator. When the line is moving up, economy is strengthening. It is also good for assett allocation in the stock market.
  • Sector Rotation: Prior to May, when the ratio was rising, and inflation was building up, you wanted to be in commodity stocks (copper and metals). After May, when commodity prices peaked and the Fed talked about raising interest rates, want to rotate money to the financial stocks.
  • Bond Influence: Generally, stocks are influenced by bonds, and do best when bond prices are rising (positive coorelation).
  • Food Stocks: Corn vs. Food stocks (ADM). When price of corn drops, the price of ADM goes up.
  • Copper and Metal Stocks: How individual commodity (Copper) affect whole stock groups (Metals). Very often, the stock leads the commodities, but commodities still influence the stock. These markets (copper and aluminum) are good economic indicators – they are not influenced by the weather.
  • Oil Index: Transportation stocks influenced by the price of oil. Oil Index (XOI) vs. Crude Oil. The stock leads the price of the commodity. Oil stock trader has to watch the price of oil.
  • Natural Gas vs Stocks: Stock prices lead the commodity price. Look at the divergence. When they stop moving in the same direction, it is a warning of some type. Natural Gas stocks go up, why not natural gas? Eventually, natural gas catches up.
  • Financial Stocks: Historically, rising financial stocks are good for bonds; they lead.
  • Aluminum Shares: London Aluminum. Looking at 1995 to 1996. Rising prices of Aluminum shares (S&P index, include such stocks like AA) led the price of London Aluminum (commodity). Can act as an economic indicator. If these commodities are tied to the economy, then if aluminum is going up, wouldn’t that imply economic strength, which would put upward pressure on interest rates. Higher interest rates diminish bond prices. There should also be strength in the US dollar. If US rates are moving higher relative to overseas rates, it is bullish for the dollar. So, the strength of the dollar is tied to the increase in Aluminum shares. Still, need to look how the Aluminum shares are doing relative to the overall market – look at the relative strength chart (vs. S&P 500). Draw a trend line off of the releative strength chart to identify the breakout and timing to rotate into that sector.
  • Mutual Funds: There are mutual finds (like Fidelity Select Energy fund) that match sectors. Can’t buy the index, but can buy the mutual fund. You can apply technical analysis to these funds.
  • Mutual Funds Gold: Fidelity Select precious metals.
  • Gold/Dollar Relationship: Basic intermarket principle. When the dollar is very strong, gold is normally very weak.
  • Gold vs Russell 2000 Index: The rising dollar also affects the Russell 2000 Index (small stocks). Small stocks do better when the US dollar is strong; they are primarily domestic. Large stocks have international exposure.
  • John Wraps It Up: Point:  The futures market has a tremendous impact on the other markets. If you trade stocks, you must know what is going on in the futures.
  • Q&AThe Visual Investor (his book) was written for the general audience.  Generally speaking, John Murphy uses the 50 (10wk) and the 200 (40wk) DMA when looking at a stock chart. When looking at Futures, uses 20 and 40DMA.


Technical analysis is a skill that improves with experience and study. Always be a student and keep learning. – John Murphy

Currently there are "2 comments" on this Article:

  1. Dlux says:

    “The futures markets have a tremendous impact on what happens in the other markets.”


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