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Indices Relationship With Members (Components)


Guest tradingsydney

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Guest tradingsydney

Hi Everyone,

I have been trading indices for nearly 2 years, while I find them very difficult to understand at times, they could be smooth and easy at other times. I usually trade candlesticks combined with volume, bollinger bands and moving averages and considering how the members  shares are going.

What I can't understand is that components are massively in the red in bulk, however the index in question is rallying with no hesitation whatsoever. Take Japan for example, members were 98% in the red, but the actual index rallied 280pts since the market opened.

Can someone explain this to me please?

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Guest ChrisN

The best example I heard to explain this is the following... "Think of it as a whole load of people on one side of the boat. It doesn't take much for it to flick over." If sentiment is that extreme (in this case short) then a small movement up will take out the very close stops which then all become buys and then the next level of stops are taken out which become buys etc. Result is a very rapid move in the opposite direction. Often seen at turning points.

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