Technical Analysis - Not For Indices

The basic premise of technical analysis is to use past stock performance to predict future price trends. Technical analysis is one of the most debated strategies in all of investing. Whether it is beneficial for making money on the stock market is not the topic of this post. Personally I do believe in technical analysis when trading individual stocks. However, I don’t feel that technical analysis has much significance when it comes to indices. Let’s investigate my reasoning.

Indices such as the TSX Composite Index and the S&P500 track the performance of large-cap companies from Canada & the United States, respectively. The indices move up or down with the stocks that they track. Here’s why I’m not a fan of technical analysis on indices: Stocks trade irregardless of the indice.

• Therefore resistance and support levels for an indice are coincidental. Investors are generally not consulting the indice when making an individual trade.
• Today the TSX blew through 10,000 points. Were the investors aware that they were pushing it over such a big round “psychological” number? Nope. They were simply buying an individual stock. Its different when it comes to something like gold; $1000 / ounce may be a natural resistance level on the way up.
• Moving averages on an indice can’t really be used to help an investor. Heavily weighted stocks or entire sectors within an indice can be down on bad news, yet the indice may still go up.

Overall, the market indices are just used to track overall market optimism or pessimism. If your trading an ETF that tracks an indice, I guess the trend is your friend. Obviously fundamental analysis cannot be performed on an indice, but technical analysis isn’t much help either. Indices are not subject to psychological barriers, support, or resistance levels. Patterns may appear, but they don’t necessarily shine light on the direction of the individual stocks. What are your thoughts on technical analysis for the major indices? Significant, or completely useless?