ETF's and S/R

S

ShoeshineBoy

I use support/resistance ideas regularly in my trading with individual stocks. But does trading using support/resistance make sense with an ETF where the “stock” is based on an index of dozens of underlying stocks? Mathematically this makes no sense to me. Why would dozens of stocks going through their own indivicual S/R levels piece together into a magical index-level S/R?

I see people discuss it quite often, so I figure that there has to be a good explanation. Is this because the ETF, through large-institution arbitrage, can actually exert pressure on the underlying stocks and make the S/R “stick” so to speak?
 
Your question might also ask if looking at support/resistance on an index is valid - which it is.

Because trading in the ETF and/or based on the related index and/or index futures actively affects the constituent stocks. If it's tradable (at least if it's tradable in reasonable volume), support/resistance also applies to an ETF.

Example, trading in the SPY causes trading in the underlying securities which affects the S&P index and the S&P futures due to arbitrage and normal market dynamics. Conversely, trading in the futures or as a result of changes in the index affects prices in the SPY.

Because the cash index, the futures, and the SPY are dynamically linked via arbitrage, at any given time the affects of support/resistance on any one of them can impact the trading of all three, so the SR picture is a bit more complex than for a single stock and it's often helpful watch all three for your cues.

When trading the S&P emini I find it useful to have charts for the ES, the S&P index, and the SPYders up with their respective support/resistance.
 
We have been exclusively trading ETFs for the past six months and have to tell you that ETFs definitely follow support and resistance levels, as well as trendlines. In fact, one of the reasons my profitability has increased so much with ETFs is purely because they DO follow support and resistance levels MUCH better than individual stocks.

It may seem odd, but I think it happens because the composite of the underlying stocks also follows individual support/resistance levels, which are smoothed out even more when averaged together. SPY, for example, trends very well and usually follows support/resistance levels to a T.
 
Thanks. I found something similar thru backtesting but didn't believe my results because I couldn't understand the market mechanics. I was afraid I had just taken a Random Walk...
 
I started a post for support and resistance lines last week. If you do a search you can download it. I put all the etfs and their info into the spread sheet and it will calculate it automatically.
 
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