Technical anaylsis on indices.

[Iotrez]

With an individual company I can see why trendlines should develop ie because everyone is looking at the same company, so they are all seeing the price do the same thing (such as hitting an existing trend line) and so enough people buy/sell at that point to make it a self fufilling prophecy.

When trading indices however, because they are made up of lots of different companys there will be lots of people only trading one company and they will be looking at completely different technical data on their charts to another individual who is trading another company. But both individuals affect the overall index.

So how can trendlines develop on charts of indices?

Thanks.

 

[Rhody Trader]

Putting aside the fact that indices can be traded in their own right a number of different ways, the action of indices influences the underlying stocks. It's not as direct as it is the other way around, of course, but traders most definitely do not trade stocks in isolation.

 

[oiltanker]

indices are more volatile which is why brokers love them and will promote study of them by newbies.

a market made up of 100 variables is not the same as a market made up of one.

as for trendlines most market are 60% plus computers many of whom do not base their trading on the idea that price has memory. Indeed for some the only reason why they might believe price has memory is to profit from those who do.

 

[Rhody Trader]

indices are more volatile.....

You might want to go back and check your figures there. Indices are most definitely NOT more volatile than individual stocks. It is in their very nature to smooth out the volatility.

 

[Dacamic]

indices are more volatile which is why brokers love them and will promote study of them by newbies.

a market made up of 100 variables is not the same as a market made up of one.

as for trendlines most market are 60% plus computers many of whom do not base their trading on the idea that price has memory. Indeed for some the only reason why they might believe price has memory is to profit from those who do.

Some stocks will have more volatility than their index, and some will have less. A quick scan of the S&P 500 shows about 80% of its component stocks currently have more volatility than the S&P 500 index (based upon the most recent 20 trading days). In both the NASDAQ 100 and Russell 2000, about 85% of their stocks are currently more volatile than the index.

If price does not have "memory", does that mean stocks are traded without benefit (or burden) of knowing previous prices?

 

[alfiemal]

Hi all, I usually trade FX so im not too knowledgable about index trading, just a question I have been thinking of lately as i may try short term indices trading myself, I know the indices actual value is created by the stocks which form them, but is that true of the index futures market? Is the indices futures just a futures contract without any contributions from stocks?

Also is it even possible to trade say the actual Dow or FTSE level quoted on bloomberg, or is it only possible to trade the Dow or FTSE futures levels which are different? I was talking to an experienced trader lately and he told me never to try short term spread betting on the indices quotes as they are not actual real markets, he said the 'daily wall street' doesnt even exist, and short term trading it would be suicide!

'So how can trendlines develop on charts of indices?' I would say if the futures price of an index is not the sum of all its constituents, and the way indices are traded is through futures contracts then I suppose that is why support and resistance and trendlines etc.. would work on Indices trading?? But maybe Im getting completely mixed up! Ha Ha!

Any clarification would be welcome, thanks.

 

[alfiemal]

Hi could someone clarify something for me with regards index trading, i am considering trading them soon, when we say trade the index eg Dow, does that mean the futures price or the actual dow level?, also I am not aware of any way to trade the actual FTSE or Dow level, i have only seen Dow Futures etc... I was told by an experienced trader to stay away from short term spread betting indices as its not a true market.

With regards the original question 'so how can trendlines develop on charts of indices?' i suppose the futures level reacts to trendlines and support and resistance etc.. as the futures price is not a result of the companys of the index, it is simply its own contract which is being created by traders rather than lots of different companys stock values! If im completely incorrect could someone please clarify?

 

[blackcab]

The Dow or SP500 indices are not tradeable instruments*. You can however trade the Dow or SP500 index futures (or their smaller cousins the eminis) with a direct access broker. Get a copy of the CBOT Dow Complex Reference Guide (last updated in 2004) from CBOT/CME and see p.15 for an explanation of index vs futures pricing, fair value and arbitrage.

* Spreadbet companies quote their own Dow-derived product and call it DJ30 or Daily Dow etc. but this is their own product, not the index itself, nor the futures. You're placing bets with a bookie against their own instrument that they can effectively set as they like. What they set it to depends on what their own analysis tells them the real index or futures might do, and what positions their customers currently have, and what their analysis tell them their customers are likely to do based on what they do and what the real market is doing/might do. And for all I know they also factor in what they think their customers will do in response to what they do as a result of what their customers are doing - I know that you know that I know X so I'm going to do Y instead of Z - recursion hell, aaargh. Some people seem to make a fine living spreadbetting though, so they can make it work.