Indices - stocks correlation. How to trade?

L

Leopard9

Hello everyone. I would like to ask you experienced traders how to understand the indices and stocks correlation when trading stocks. In my case, i mostly trade tech stocks on a daily basis. My observations are that stocks mostly do what the nasdaq is doing, unless the volume is huge (Ex, AMD today), causing a divergence. When the nasdaq retraces, so do most stocks. When it trends, stocks follow.
Big stocks like amazon lead indices but indices tend to control stock behaviour on less volume. Is this correct?
 
It works both ways. Many people just buy/sell the index which in turn moves the stocks.

If I’m reading your question correctly, yes. There are leaders in a category, and other stocks follow the leaders. Ideally you want to look for stocks leading in sectors that are leading. Relative charts is how you identify. With the advent of all of the etf’s it’s gotten easier. Check to see if xle, xlf, xlk, xlu, etc., are beating spy, then check to see which stocks in the strongest sectors are the leaders. That, imo, would be where you should fish
 
Some days is almost annoying, stock charts on 5/15 minute candles are a copy of the nasdaq chart with small variations. There is more divergence on the stocks with more volume, but those usually trend a lot better with less retracements.
Any advanced strategies here that you guys use?
 
treeman said:
It works both ways. Many people just buy/sell the index which in turn moves the stocks.

If I’m reading your question correctly, yes. There are leaders in a category, and other stocks follow the leaders. Ideally you want to look for stocks leading in sectors that are leading. Relative charts is how you identify. With the advent of all of the etf’s it’s gotten easier. Check to see if xle, xlf, xlk, xlu, etc., are beating spy, then check to see which stocks in the strongest sectors are the leaders. That, imo, would be where you should fish
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Its a nice tip. Yet I stick to 4-10 stocks/day watchlist mostly on the tech space. My plan since I started trading with discipline and a good broker (finally!) is to base my stock entry points on the nasdaq both on market open and the first impulsive moves and retracements. Its going well with good stop loss trailing management but maybe the process can be improved. Any ideas?
 
Leopard9 said:
Hello everyone. I would like to ask you experienced traders how to understand the indices and stocks correlation when trading stocks. In my case, i mostly trade tech stocks on a daily basis. My observations are that stocks mostly do what the nasdaq is doing, unless the volume is huge (Ex, AMD today), causing a divergence. When the nasdaq retraces, so do most stocks. When it trends, stocks follow.
Big stocks like amazon lead indices but indices tend to control stock behaviour on less volume. Is this correct?
More...
I think this is related to the Beta. check it !
 
Yes there is a correlation between the stock and the index, but the strength of the correlation depends on a) which index, and b) what percentage of the index does that stock comprise. Using your example of AMD, according to the Pearson Correlation formula, the daily price changes of AMD have a 32% correlation with QQQ and XLK, but a 55% correlation with SOXX, the ETF that tracks the PHLX Semiconductor Index.
 
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