Why does technical analysis work on indices?

barjon

Legendary member
Yes, I absolutely agree that the futures market has no influence at all on the FTSE index price and how it moves. The FTSE in no way 'reflects' what is happening in the futures market. The FTSE price is entirely based on the prices of the stocks listed in the index. Hence, any kind of technical analysis is totally irrelevant and useless when it comes to predicting how the FTSE will move. When you see anybody applying technical indicators to an INDEX (e.g. support, resistance, head & shoulders, etc.) you know they are in cloud cukoo land.

I suppose that when the NASDAQ index opens around 50 up, say, after the futures have gone up around 50 overnight while the US market is closed it’s just a coincidence is it? You don’t think it’s at all possible that the movement in the futures has had any influence?
 

FXX

Experienced member
I suppose that when the NASDAQ index opens around 50 up, say, after the futures have gone up around 50 overnight while the US market is closed it’s just a coincidence is it? You don’t think it’s at all possible that the movement in the futures has had any influence?
Here is the formula for the Nasdaq. Please note there is absolutely zero component in the formula that accounts for the futures market. What you are observing is participants anticipating news and reacting on that before the market opens. It is NOT some special correlation as you are referring to. The common component between the futures and the underlying is news and the anticipation of that news.



The NASDAQ Composite Index is a market capitalization-weighted index. The value of the Index equals the aggregate value of the Index share weights, also known as the Index Shares, of each of the Index Securities multiplied by each such security’s Last Sale Price1and divided by the divisor of the Index. The divisor serves the purpose of scaling such aggregate value to a lower order of magnitude which is more desirable for reporting purposes. If trading in an Index Security is halted on its primary listing market, the most recent Last Sale Price for that security is used for all index computations until trading on such market resumes. Likewise, the most recent Last Sale Price is used if trading in a security is halted on its primary listing market before the market is open. The Index began on February 5, 1971 at a Base Value of 100.00.The formula for index value is as follows:



Aggregate Adjusted Market Value/Divisor


The formula for the divisor is as follows:

(Market Value after Adjustments/Market Value before Adjustments) X Divisor before Adjustments



Six versions of the Index are calculated:

 The price return index in USD (Nasdaq: COMP) is ordinarily calculated without regard to cash dividends on Index Securities.


 The total return index in USD (Nasdaq: XCMP) reinvests cash dividends on the ex-date. The total return index in USD was synchronized to the value of the price return index at the close on September 24, 2003.


 The notational net total return index in USD (Nasdaq: XCMPNNR) is designed to reflect a net total return index reinvesting 70% of cash dividends, and factors in a deduction based on an indicative 30% tax rate. The notional net total return in USD index began on December 21, 2017 at a base value of 1000.00.


 The price return index in CAD (Nasdaq: COMPCAD) is ordinarily calculated without regard to cash dividends on Index Securities. The price return in CAD index began on December 21, 2017 at a base value of 1000.00.


 The total return index in CAD (Nasdaq: XCMPCAD) reinvests cash dividends on the ex-date. The total return in CAD index began on December 21, 2017 at a base value of 1000.00.

 The notational net total return index in CAD (Nasdaq: XCMPCADNNR) is designed to reflect a net total return index reinvesting 70% of cash dividends, and factors in a deduction based on an indicative 30% tax rate. The notional net total return in CAD index began on December 21, 2017 at a base value of 1000.00.
 
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barjon

Legendary member
[/B]QUOTE=FXX;3037620]Here is the formula for the Nasdaq. Please note there is absolutely zero component in the formula that accounts for the futures market. What you are observing is participants anticipating news and reacting on that before the market opens. [/QUOTE]

For pities sake how many times must I say it. I KNOW THERE IS NO COMPONENT IN THE FORMULA THAT ACCOUNTS FOR THE FUTURES MARKET.

Now answer the question I put. Do you think the 50 point overnight rise in the futures had any bearing on the fact that the index went a similar degree higher when the market opened?

I don’t care if you call it reacting to the news that the futures went up or reacting to the fact that they went up. One thing for certain is that the futures could not have been reacting to the index because the market was closed.
 

FXX

Experienced member
Now answer the question I put. Do you think the 50 point overnight rise in the futures had any bearing on the fact that the index went a similar degree higher when the market opened?

Of course there will be movement in the index but it is not for the reasons you put forth.

So what is the futures market reacting to? - It's news! This is an important question because the same news will cause the same reaction in the index when it opens. You seem to see it differently however, kind of like the tail wagging the dog. You see it as movement itself in the futures market having a primary influence on share prices.

All I am saying is that the share prices themselves are influenced by what’s happening on the futures.

This is a first for me i must admit. An investor or trader buying or selling an individual stock because a futures instrument of a basket of stocks is moving.

I don't think we are making any progress with this debate. I am moving along now so wish you all the best in your trading.
 
The market value or price of a futures contract is approximately equal to the current value of the underlying shares or index, plus an amount referred to as the 'cost of carry'. If the price of the NASDAQ index opens around 50 up, say, it means that the average value of all the shares in the NASDAQ have gone up 50, and this is relfected in the futures market also going up, say, 50. The NASDAQ price is reflected in the futures price, not the other way round.
Another way to look at it relates to sentinment. If the market (we punters) think that share prices will go up (e.g. we think that good economic figures will come out) this will make the NASDAQ go up, and simultanously it will make the futures market go up. The futures prices/market never influences the INDEX prices/market. It's always the other way round.
 

barjon

Legendary member
The market value or price of a futures contract is approximately equal to the current value of the underlying shares or index, plus an amount referred to as the 'cost of carry'. If the price of the NASDAQ index opens around 50 up, say, it means that the average value of all the shares in the NASDAQ have gone up 50, and this is relfected in the futures market also going up, say, 50. The NASDAQ price is reflected in the futures price, not the other way round.
Another way to look at it relates to sentinment. If the market (we punters) think that share prices will go up (e.g. we think that good economic figures will come out) this will make the NASDAQ go up, and simultanously it will make the futures market go up. The futures prices/market never influences the INDEX prices/market. It's always the other way round.

The futures in the example have gone up first - overnight while the US market is closed. So they can’t have been influenced by the INDEX can they. Heaven to Betsy.
 
My last comment in this thread: you are ignoring market sentiment. It may appear that futures prices went up first and then the INDEX price reflected this. But in reality it was the other way round. Market sentiment made punters in the futures market push up futures prices (the punters thought that share prices would go up, and hence the index would go up). So punters in the futures market try to anticipate this. It is the anticipation in the futures market (the sentiment) that made futures prices go up, and if the INDEX price also went up, it simply means that the market sentiment felt by punters in futures turned out to me correct. The point here is that any kind of technical indicator applied to a candle chart of an INDEX cannot posibly work because each candle represents the average price of all the shares in the INDEX, so things like self-fulfilling prophecy cannot apply. Technical indicators (sometimes) work on a particular share price, commodity or currency because millions of other punters see the same pattern of an indicator and make a decision. This decision influences the price (self-fulfilling prophecy). But that can never work for an INDEX because whatever your decision to enter or not enter the market will not affect the ups and downs of the INDEX. Hope that helps, but I won't be comenting further in this particular thread.
 

timsk

Legendary member
. . . The NASDAQ price is reflected in the futures price, not the other way round. . .
Hi russell444,
The passage in navy blue below is an extract from the Essentials of Indices Sticky here on T2W - which I wrote and posted 8 years ago. (See post #2 and scroll down to the heading 'CASH & FUTURES'.) If I've understood what you're saying correctly, then the information provided is incorrect? I'd be interested to hear your thoughts on this.

NB: you'll see that the extract contains a direct quote of a FAQ from Capital Spreads - a spread betting company that is now called the London Capital Group. So, although this FAQ is no longer available, I assure you that I quoted it verbatim at the time.

Thanks,
Tim.

. . .The values of index futures are different to their cash counterparts for a number of reasons, the main ones being the ‘Cost of Carry’ and ‘Fair Value’. These are best explained in a quote from the FAQ section of CapitalSpreads’ website in answer to the question: ‘How are daily FTSE and Wall Street prices calculated?’

“All major indices quoted by Capital Spreads have a futures market related to them (i.e. the FTSE 100 has the LIFFE FTSE Futures market). This future trades at a price which reflects the underlying market plus some adjustments. These adjustments are calculated from the theoretical value of dividends payable between today and the expiry date of the future AND the ‘cost of carry’ for the index over the same period.

This adjustment is called 'Fair Value'. Capital Spreads will adjust the Daily Cash price of each index by its own Fair Value number each day. Capital Spreads links the Rolling Daily quote to the relevant future concerned and offsets the quote by the current Fair Value. Therefore the Rolling Daily price is moved by the Futures price and not vice versa, this is because the underlying cash price is a lagging market indicator which does not react in a timely manner to market moving news.”


The final sentence is emphasized in bold primarily for the benefit of new traders who wish to focus on instruments offered by spread betting companies that are intended to mirror the cash indices. Anyone who attempts to trade these instruments without taking the futures into account and understanding how the futures impacts the cash market is, in effect, trading with one eye shut!
 

FXX

Experienced member
Nice one - you’re wasting your time, though, because we’ve been assured that it doesn’t happen :)

it doesn't :)

Reuters coverage of the day:

"Wall Street surged on Wednesday, with the Dow industrials and S&P 500 hitting fresh records, as equities continued their march upward after the election of Donald Trump as U.S. president, and a new high for transportation stocks added to the bullish tone. U.S. equities have scaled new highs since the election, with investors encouraged by Trump’s plans for economic stimulus and to reduce corporate taxes and regulations.

A $3-billion trading program to buy a broad spectrum of stocks also came into the market in the afternoon and “really just sparked this market to move higher and higher,” said Jonathan Corpina, senior managing partner for Meridian Equity Partners, an equity and options broker-dealer in New York.

Traders also pointed to covering of short positions ahead of Thursday’s meeting of the European Central Bank as a catalyst driving the market higher.

Trump’s victory has been seen as a boon, particularly for financial and industrial stocks that have surged since the election.

The Dow Jones industrial average .DJI rose 297.84 points, or 1.55 percent, to 19,549.62, the S&P 500 .SPX gained 29.12 points, or 1.32 percent, to 2,241.35 and the Nasdaq Composite .IXIC added 60.76 points, or 1.14 percent, to 5,393.76.
"


Additional news on that day was Trump electing a climate change sceptic to run the environmental protection agency.


Plenty of fundamentals there in conjunction with an existing Trump rally that was gaining momentum. Markets were at all time highs and there was likely many large orders waiting to be triggered which as the article describes happened. It also notes at the beginning that the original thought a single order was in fact incorrect and that it actually was about 300 separate orders from different buyers. What triggered their algorithms to do this, isn't it obvious?

right back to leaving this thread alone
 
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hatemypips

Established member
It works because others use it. Self-fulfilling prophecy actually, which we still can't avoid
 
 
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