Why does technical analysis work on indices?

russell444

Newbie
6 0
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.
 

FXX

Experienced member
1,269 264
Good post fxx, Ive often wondered why the indexes have such a positive correlation, Could you explain the above in a little more detail or by means of an example ?
An example taken from the web

Note :Notional value = price of futures contract x contract multiplier.

assume the E-mini S&P 500 futures are priced at $2185.00, which results in a notional value of $109,250. Now consider a portfolio manager with a $10 million S&P 500 equity risk position. Suppose she wants to reduce her exposure to the S&P 500 index by 10%. She could utilize E-mini S&P 500 futures by selling futures in a ratio based on the notional value of the futures contract.

Hedge ratio = value at risk ÷ notional value of futures contract

In this case, 10% of $10 million is $1 million that needs to be hedged. To calculate the equivalent futures contracts needed to hedge this position, divide $1 million by the notional value of the futures contract, which is $109,250. This equals 9.15, or the equivalent of nine E-mini S&P 500 futures contracts.
Say the S&P 500 index goes down by 3%, from 2185.00 to 2119.50, a drop of 65.5 index points. The portfolio loses 3% or $300,000. If the manager sold nine futures contracts, she would have gained $29,475. This is derived as follows: 2185.00 – 2119.50 = 65.50 index points: 65.50 index points x $50 per point x 9 contracts = $29,475.
The portfolio manager’s net result is $300,000 minus $29,475 = $270,525 or a 2.7% loss rather than 3.0%. She has effectively reduced her losses by 10% adding value to her shareholders.


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barjon

Legendary member
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It doesn't reflect what's happening on the futures. Its calculated off a formula and that formula has zero parameters that's derived from the futures market (i work at an an index provider and very familiar with the process). The futures market reflects the a market of hedging risk on the underlying. There is zero influence the futures market has on the underlying index because the formula is based on the composition data and not a future value component.

Go look at ftse calculation pdf if you don't believe me.

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I know. All I am saying is that the share prices themselves are influenced by what’s happening on the futures (and, of course, vice versa). That change in the share price then causes a change in the index value.
Why don’t you guys read what I said rather than dispute something I didn’t say. I KNOW HOW THE INDEX IS CALCULATED THANK YOU.
 
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FXX

Experienced member
1,269 264
I know. All I am saying is that the share prices themselves are influenced by what’s happening on the futures (and, of course, vice versa). That change in the share price then causes a change in the index value.
Why don’t you guys read what I said rather than dispute something I didn’t say. I KNOW HOW THE INDEX IS CALCULATED THANK YOU.
Sorry barjon, I mean no offence. I don't agree that the futures influences share price. It is in fact the other way around. The price of an individual stock is influenced by the company results, takeover bids, new product launches, regulatory, company performance, geopolitical events, and economic conditions. It can't possibly be influenced by a futures market because the futures market is underpinned by the underlying.





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barjon

Legendary member
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Sorry barjon, I mean no offence. I don't agree that the futures influences share price. It is in fact the other way around. The price of an individual stock is influenced by the company results, takeover bids, new product launches, regulatory, company performance, geopolitical events, and economic conditions. It can't possibly be influenced by a futures market because the futures market is underpinned by the underlying.





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Well, you’ve a lot to learn then :LOL: (joke, in case you think otherwise). Search back on here and you’ll find plenty of good debate on what is leading what. It goes both ways.

If you think futures are lagging and follow what the shares do (index does) then just watch the instantaneous response on futures as traders hit the button on important news releases.
 

FXX

Experienced member
1,269 264
Well, you’ve a lot to learn then [emoji38] (joke, in case you think otherwise). Search back on here and you’ll find plenty of good debate on what is leading what. It goes both ways.

If you think futures are lagging and follow what the shares do (index does) then just watch the instantaneous response on futures as traders hit the button on important news releases.

I don't need to learn from a forum. I get my information from working at investment banks, hedge funds, and exchanges. My job is to work with sensitive trade data meaning I work close to trading desks. A forum has zero merit by my books.



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FXX

Experienced member
1,269 264
just watch the instantaneous response on futures as traders hit the button on important news releases.

I trade the news in case you are not aware of this so know very well how it affects the market. You don't seem to understand the purpose of the futures market. If a news release happens, do you think it drives the futures market first and then the stock market?



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barjon

Legendary member
10,705 1,809
I trade the news in case you are not aware of this so know very well how it affects the market. You don't seem to understand the purpose of the futures market. If a news release happens, do you think it drives the futures market first and then the stock market?



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No I think traders are making their assessments on whether the news is going to be good or bad for the market and trading accordingly (with a bit of bluff thrown into the mix).

As an aside I respect your position that all is down to the shares in the end and that fundamentals rule ultimately. That doesn’t necessarily help day to day trading though.

Towards the end of the tech bubble, for example, many a wise head was pointing out that the tech shares were grossly overvalued. They were ultimately proved right but they would have lost a lot of money continually shorting before the bubble finally burst. Those TA trend followers, though, did very nicely.
 

mpups

Experienced member
1,023 143
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.

That's right because on Earth the technical analysis fairies only have enough power to move individual stocks, only in cloud cuckoo land is their magic strong enough to move the whole index
 
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tomorton

Legendary member
8,421 1,346
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.


Very funny. Really funny.
 

barjon

Legendary member
10,705 1,809
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
1,269 264
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
10,705 1,809
[/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
1,269 264
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.
 
 
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