Why does an indice have areas of support/resistance?

[aparoid89]

Why would an average of the top 100 stock prices exhibit support/resistance when there is no way to directly purchase the ftse 100?

Does this mean that someone who was looking to buy Barclays plc would wait for the ftse 100 to reach an area of support to buy the company stock? If the indice reached resistance would someone with an individual stock sell for that reason?

 

[Rhody Trader]

There are multiple ways to trade the FTSE 100 - ETFs, futures, options. And, of course, institutions can buy and sell the underlying basket of stocks all in one go if they wished.

 

[Vicorka]

Why would an average of the top 100 stock prices exhibit support/resistance when there is no way to directly purchase the ftse 100?

Does this mean that someone who was looking to buy Barclays plc would wait for the ftse 100 to reach an area of support to buy the company stock? If the indice reached resistance would someone with an individual stock sell for that reason?

Because of the way the index is calculated it reflects the sentiment in those 100 companies. Yes, you may wait when index reach a support and then buy your stock. It called "do not trade against general market trend". However, it could be recommended to check your stock as well: 1) how well it is correlated with benchmark index (see beta) and 2) are they any other than general market decline reasons of your stock decline (court,...)

 

[thunderstruck]

that is why i sometimes hate technical analysis . It can give support resistance etc to a graph of GAP sales . I think that the graph of a weighted basketof stocks is useless. The graph of the future on that index has some value , as by looking on the graph you can explain the behavior of the financial product ,

What would be really scientific is to monitor the stocks that comprise this index -their fundamental , techncals etc- and based on the info on specific stocks trade the future . I did that in the past with 3 other people for a while and we failed but I still think its a good idea but it requires a lot of people to work together

i find usefull only the technical analysis of the future and the individual stocks . The index itself ia what vicorka says : index of general market trend and a benchmark for other stocks .

PS What i am saying it makes little snse to monitor the index to predict one stock's direction but it maks a lot of sense to monitor the basket of stocks -if not all of them just the ones with the highest rate- to predict and trade the index.

 

[trade_canada]

A factor that contributes to support and resistance levels is group psychology. SR is one of the most basic set ups taught to traders, and as a result the areas surrounding these levels turn into decision points where the price bounces or breaks. There isn't some far fetched mathematical theory to these levels, simply traders expect a significant price event to occur and bet according to their opinions on price direction. Again this is only one of the factors at play with SR and indices, if you want a more thorough answer read up on how the various products associated with them are structured and traded.

 

[Kinley14]

Hi,
I've been wondering over this for a long long time, thanks for all the clarifications.

 

[SavantK]

That is why forums are all about