Technical Analysis and Tape reading for index futures.

[JossBeaumont]

Hi!


I am beginner trader and after reading the sticky posts and a few books on the subject there's still something I don't understand about index futures.

In the case of stocks for example, the price of a particular stock is driven by the bids and offers.
In this context, a resistance for example, is a level where aggressive sellers entered the market and we can can expect that if we reach this level again aggressive sellers will appear again. The same is true for all the TA concepts (support levels, trend lines, patterns, etc...).
We can also read the tape in order to see in details the actions of market participants and anticipate their movements.

But in the case of index futures, the price is only the reflection of the index himself, which is calculated by averaging the prices of the stocks by which it is composed.
In this case I don't understand how all the TA concepts can be relevant. The actions of the buyers and sellers is only the CONSEQUENCE of the value of the index.

Let's say that at some point the index future reach a certain level and the price drop. Later in the session the same price is reached, I don't see how this same price could have any resistance value because meanwhile all of the prices of the stocks composing the index has changed, it is only their average which is again the same, therefore the price will just continue to go up if the index goes up and drops if the index drops. In short the movements of the future will have little to do with the sentiment of participants of this future market but they will be essentially driven by the movements of the index.

About tape reading:
For a stock, if I see on the tape a "held bid" (a buyer who is buying everything he can at a certain price and won't let it drop), I can conclude that there's a high probability that the stock will go higher.
But in the case of an index future, I don't understand how this same situation could have any predictive value because again, the fact that a buyer won't let the price drop is only a consequence of the index movement which is nothing more than an average of stocks and the future movements are entirely conditioned by the index movements.

I hope this is comprehensible...

Thanks for your help!


PS: I realize this is a very basic question and if you think some books or articles will help me to clarify these points, feel free to tell me which ones.

 

[barjon]

joss

The futures are directly tradeable instruments and are thus subject to the same supply and demand factors as anything else that is directly tradeable. Don't forget, too, that what is happening with the futures influences the buying/selling of stocks and therefore what happens to the index.

 

[timsk]

But in the case of index futures, the price is only the reflection of the index himself, which is calculated by averaging the prices of the stocks by which it is composed.

Hi Joss,
I think the sentence I've quoted from your post is at the heart of your confusion. What you write applies to the cash indices, not the futures indices. The futures and cash, although highly correlated, are two separate entities. If you've not read it already, read the Essentials of Indices Sticky. The relationship between the cash and futures is discussed in there.

Also, it's worth remembering that most stock traders look at the futures markets. And visa versa. When I traded index futures, I watched the $Tick market breadth indicator like a hawk. I don't want to get involved in a discussion about the relative merits of TA - you'll need to make up your own mind about that. However, it's fairly a safe bet that all the traders out thee that do put some store in TA are just as likely to notice and act upon a pattern developing in the index futures as they are a pattern in the equity markets. So, for example, if you see the ES (e-mini S&P 500) has hit a major resistance level and appears to be consolidating or reversing, you're going to be very wary indeed about going long on an individual stock. Most equity traders will try and be 'in sync' with whatever the futures are doing. Conversely, futures traders know that if big program trades print indicating institutional dumping of equities - they don't want to be long.
HTH.
Tim.