Are S/R on an index ETF usable areas??

Discussion in 'Technical Analysis' started by lbhere, Oct 4, 2019.

  1. lbhere


    I have been trading on the QQQ for over a month now. I am using trend lines and support / resistance (S/R) areas along with other candlestick formations to get in and out. I have not been doing poorly using this method, although I am still new and the market has had some VERY strong trending days, so it may just be the current market circumstances. ( I trade on the 2- and 5-minute charts, using higher time frames to mark S/R areas.)

    But I am reading a book on S/R so that I continue to hone my skills, and this book just said, "SR does not apply well to market indexes, because no one trades the index (except through limited index options). Since an index represents a broad cross-sample of many stocks, it cannot possess an individual SR. While an index trading range may appear to be acting in the same manner as that of an individual stock, it is not the same. index cannot exhibit the patterns known to belong to individual stocks.

    Since the index is a composite of many stocks, including those with disparate trading ranges and trends, there is a washing effect in the index itself. For many technicians, the index is useless for the purpose of evaluating individual stocks, which is what most investors would be expected to use SR to accomplish."

    So have I just been lucky or do other traders employ S/R areas on an index etf??
    murray t turtle likes this.
  2. Da fuq?...

    I'm not a big equities guy, but every equities trader I know (that's not a huge number, but some) trades them. Lots of them use TA, S/R, and lots of other dark magic to interpret what they see.

    If you leave that book in your bathroom, it may yet come in handy. At least if the paper is soft.
    lbhere, Orbiter, Bum and 2 others like this.
  3. tommcginnis


    Okay now, did you see what I did there? :cool:

  4. Sig


    It is useless to talk weak form efficient markets with a chartist, they've bought into a cult that makes them feel part of a special club and people mocking them actually enhances that effect for them. I've moved to substituting "behavioral finance" in for whatever breaking a teacup over someone's head and shoulders pattern thingy they're talking about and it allows me to see them a little more charitably. There is a tiny bit of there there probably, they're just going about it in a very inefficient manner compared to, say that whole scientific method nonsense.
    tommcginnis likes this.
  5. Those sentences which you quote from that book are rather strangely worded. I can see why they easily lead to incorrect interpretations.
    An equity index (e.g. QQQ) is the composite of multiple underlying companies' stock tickers. This equity index will thus move according to the collected moves of all these companies together. As such the index gives an impression of the total represented market. As each company only has a limited influence on the index, are movements of the individual companies less/hardly visible in the movement of the index.
    This sentence "because no one trades the index" sounds rather strange. In principle he is correct: an index is the combination of multiple underlying symbols. As such, you cannot trade the index: it is an artificial number. But there is a huge amount of trading in ETFs and futures which track this index (plus options derived from these). In your example: QQQ and NQ/MNQ.
    I think that the author is rather harsh in the last sentence ("For many technicians, the index is useless for the purpose of evaluating individual stocks, which is what most investors would be expected to use SR to accomplish."). Many people use the index to get an impression of the overall market direction. This could provide extra color in case you want to decide how to trade an individual company's stock. Having said that, when a index has reached a S/R level it does not mean that the individual company has reached a S/R level.

    If using S/R on the QQQ works fine for you, then you should continue using it.
    comagnum and tommcginnis like this.
  6. ET180


    First question to ask is whether S/R in general is useful. It is, but in my experience (and I have run my own backtests to validate), trend is more important. Establish the trend first and figure out where the market is trying to go, then consider S/R areas second. To see this for yourself, plot S/R lines on a chart, then scroll the chart ahead and see how well the lines hold. If you just draw S/R lines without considering what the price action is telling you, you'll find that they are often broken.
  7. ETF's lol...been there done that. I am too old for this.

    Ask yourself what drives an index ETF ? There will be your answer.
    tommcginnis likes this.
  8. Orbiter


    One could argue that S/R levels don’t really work in general ( not me ) but somebody stating they work for stocks but not for ETFs/traded indexes has absolutely no clue.

    Maybe we misinterpreted the statement and the author is referring specifically to indexes that are NOT being traded in the market. Anyone can come up with an index ( e.g. smallish caps with lowish volatility and no letter b in their symbol ). It can be argued that this index doesn’t react to S/R levels and I would probably agree with that statement.
  9. Index ETF's must follow the market...has nothing to do with s/r...we have been in a perpetual bull for what seems like forever....

  10. Turveyd


    Market is only ever doing 1 of 4 things.

    1 sideways range, play range.
    2 slow momentum play range with direction
    3 running jump on hold
    4 jumping around like crazy, stay out!

    Play the right thing and exit as soon as you realise thats no longer the right thing.

    Profiting is easy just got to stop over complicating it,which is not easy!
    #10     Oct 6, 2019