Why Is It Important To Watch The Futures When Trading Index ETF’s (and stocks)
Posted by lasertrader on August 10, 2011
I hope everyone is surviving the most volatile week I can remember over the years. I see many traders trading index ETF’s to take advantage of the extreme volatility in the markets intraday. On the Stocktwits stream I often see mention of the Futures but I dont see many discussions about how watching the Futures instead of the indexes can help you make better trades in the Index ETF’s. Many folks trade the SPY off an intraday chart such as the 5 minute chart and look at support and resistance over multiple days to determine entry and exit points. You can be very successful doing this but if you want to have a better edge you should be watching the S&P 500 Futures in addition because there is information that the Futures provide that you will not see on an S&P 500 Index chart or a SPY chart that will help you from getting blindsided by reversals that seem to come out of nowhere.
Why watch the Futures? You watch them because unlike the SPY and S&P Index charts, the futures trade 24 hours with the exception of a 15 minute period from 4:15 PM ET to 4:30 PM ET. The overnight session which runs from 4:30 PM ET until 9:30 AM ET the next day is traded entirely on an electronic exchanged referred to as Globex. During the day session from 9:30 AM ET until 4:15 PM ET the Futures are trade both on the electronic exchange as well as the big contracts traded in the Futures Pits. When the Big Contract is trading the electronic exchange mirrors those Pit Traders tick for tick.
The edge come in paying attention to what happens to the Futures during the overnight “Globex” session. If you watch them on a 5 min chart you can identify areas of support and resistance that occur only during the overnight session. Quite often, overnight levels can be defined by events and market actions in other parts of the world while we sleep. The key is to realize that those overnight support and resistance levels come into play during the regular trading session. You may be in a SPY long looking at a multiday SPY 5 minute chart thinking I have 50 cents more to go before I hit resistance but then all of a sudden the SPY stops moving up and reverses out of nowhere. If you had a Futures chart with the overnight session visible you willl often find that the place the SPY reversed just happened to be a resistance level only seen in the overnight session.
Below is an example from 2 days ago. The grey shaded areas are the Globex overnight Futures session and the black areas are the regular market hours session. Notice how during the regular market hours after a drop at the open the Futures rallied up to hit a high at the green line and visited that level twice before pulling back? As you can see, that level corresponded to the overnight Futures high which served as resistance. Then, the Futures dropped rapidly and reversed dramatically right at a support level marked with the red line that could be easily seen in the overnight Futures chart. This is a powerful tool if you are trading the SPY. In many cases these support and resistance levels will not be seen in the intraday SPY charts and only in the overnight Futures charts
I also mark the following levels on my 5 minute Futures chart each day because they more often than not are levels of importance. Overnight Globex high, Overnight Globex low, the level at 4 PM ET from the previous day and the level at 4:15 Futures close of the previous day.
I hope this helps show why the Futures are important even if you aren’t directly trading them.