How to use the S&P 500 Index as your Day Trading Crystal Ball

by Meir Barak | based on content from the Market Whisperer – day trading book

Market performance is measured with market indices. Every index represents a different group of companies and is composed of different market sectors. Indices can be represented on a chart, and we observe the movement of the index by using Japanese candlestick charts. Every index and every sector has a different meaning. Some are more important, some less so, but all play a role. A market index does not serve only to show us what the market has “done,” but—above all else—to predict which way the market is trending. Because the market and sectors are responsible for 90% of price movement for the stocks we trade, it follows that if you know how to predict the market’s index movement, you will also be able to predict the price movement of the stocks in which you are planning to trade.

The S&P 500: The Most Important Day Trading Tool

The S&P 500 index (ETF: SPY) is, without a doubt, the most important index in the world. It is the focal index, the king, the day trader’s crown and scepter. Those looking to become a day trader should also hold it in high regard because it will no doubt be taught to you at any good trading academy. It was developed by the financial services company Standard & Poor’s, giving rise to its initials. This index displays the prices of the 500 most widely held U.S. companies via a formula that calculates the importance and influence of these top 500 companies according to S&P specialists’ considerations. The S&P 500 is considered of highest quality due to its broad range, and it serves as the benchmark for measuring the entire market’s performance. Of course, the S&P serves managers of portfolios, investment funds, hedge funds, and more in every stock exchange throughout the world.

The S&P 500 is also the most important index for the intraday trader. Why? Because 60% of a stock’s movement will be dictated by S&P 500 index movement alone. In other words, the stock you have bought will rise or fall after the S&P 500 has risen or fallen, and you will profit or lose chiefly by being dependent on market direction.

Would you like proof? Observe the connection between the S&P and Apple’s movement in the intraday chart below. If you thought Apple had a life of its own, you were wrong! All intraday movement is determined at the outset by the S&P 500 index movement. The S&P 500 index moves first, and individual companies’ shares follow.

When Buying or Selling, Don’t Fight the Direction of the S&P 500

Is it easy to make money this way? The answer is: No! Apple should move in the direction that the S&P 500 index is trending, but you can never know how much the S&P 500 index will move, how much later Apple will move in relation to the S&P 500 index, and when the S&P 500 index will reverse. Nonetheless, you can still take advantage of this information. The S&P 500 represents not only the market’s direction, but also the moods of private investors and institutional traders. Institutional traders do not buy stocks when the S&P 500 index drops. Instead, they wait patiently until the S&P 500 index downtrend causes the stock they are waiting for to drop, and they buy the stock as soon as the S&P 500 index starts moving back up. When you buy a stock, you should look for support from the institutional traders. You want their mood to be as good as possible, and you want their money to enter the stock you have just purchased. Don’t expect that to happen when the S&P 500 index is dropping. In summary, beforelive trading, watch if the S&P 500 index direction supports your day trading and never fight the direction of the S&P 500 index!