The Nasdaq market is considered to be the leader of all US stock market indices, and Nasdaq futures is considered the leading indicator:
Every trader on the stock exchange, regardless of what he trades, watches the Nasdaq futures and Nasdaq cash markets, quite often Nasdaq simply leads the other indices and its futures market in particular can provide clues about imminent trend changes.
In Particular, when markets make major transitions from the bull phase to the bear phase and vice versa, the Nasdaq market gives a clear picture. This is because nobody buys high technology stocks (Computers, semiconductors etc) unless they believe the economy is getting in better shape. But this Nasdaq leadership factor is also apparent in much shorter term trading cycles.
Case in point (Nasdaq futures and immediately after the Nasdaq cash market) bearly scratched previous lows when other markets had declined way below their lows:
The SP500 declined below its corresponding low like it was on free fall, but the Nasdaq lagged behind, the following week it appeared that Nasdaq had been leading al along in what was a reversal phase. It’s a bit tricky, but when you see the Nasdaq lagging behind other indices that amounts to leading effect in the opposite direction.
The Nasdaq futures also lead their own cash market and there are some hard to spot patterns that can identify turning points on the Nasdaq, just by watching the spread between a short dated and a long dated Nasdaq futures contracts. To safely make sense of the spread one has to watch it for many months before making decisions on it, there are however traders who use Nasdaq futures as reliable indicators.
Nasdaq Futures Or Cash
For us traders who look out for divergences between the Nasdaq and the SP500, we believe that there’s no need to bother watching the spread between Nasdaq futures and trying to make sense of it, and even if we could, it would only be useful for swing trading purposes. The thing is that, if a reliable pattern shows up on the spread, then very, very likely it will also show up on the cash markets within days, it may be a lagging/leading effect such as the one shown on the chart, or something else.
If things are unclear, one can take a look at volatility, specific Nasdaq stocks and the rest of the market. One thing we know for sure is that fund managers always just before a reversal from bear to bullish market, buy the futures on Nasdaq stocks before they buy the actual stocks. This is because their multi billion dollar buying power on the stocks will almost instantly influence the stock and futures contracts price – so they make sure they are already long with their futures contracts, and when they buy the actual stocks they have achieved an overall better deal, a lower entry price! This is another interesting pattern that reveals the footsteps of these giant traders just before a rally breaks out.
Stock Market Trading Strategies, Tips and Speculation by..
Scott Smith – Invest In The Stock Market © 2008 – 2010
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