Why does technical analysis work on indices?

russell444

Newbie
6 0
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
10,705 1,809
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.
 

russell444

Newbie
6 0
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
7,600 2,375
. . . 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
1,267 259
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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