Leveraging NASDAQ 100 Behavior and Inter-Index Relationships for Smarter Trading Decisions

Below are some key ideas which you can look into while trading Indices:

1. High Frequency Trading Algorithm:
   • Concept: High frequency trading algorithms look for disparities among different market averages.
   • Example: If the NASDAQ is leading to the upside but the S&P 500 (ES) is lagging, a high frequency trading algorithm might identify this disparity and anticipate that the S&P 500 will eventually catch up. This is known as the “sick sister” concept, where the lagging index eventually gains strength and moves in sympathy with the leading index [3].
2. Relative Strength Analysis:
   • Concept: When trading indices, it’s important to identify which index is showing the strongest price delivery.
   • Example: During an FOMC event, if the NASDAQ is showing stronger bullish behavior compared to the S&P 500 (ES), it makes more sense to trade the NASDAQ for long positions. The NASDAQ’s strength indicates it is the leader, and the S&P 500 will likely follow its movement [6].
3. Sympathetic Price Rally:
   • Concept: When one index leads in performance, other indices may follow in a sympathetic rally.
   • Example: If the NASDAQ has been the upside performer, the S&P 500 (ES) may also rise in sympathy. This means that even if the NASDAQ has already moved up, traders can still take trades in the S&P 500, expecting it to catch up to the NASDAQ’s performance [4].
4. Inefficiency and Fair Value Gaps:
   • Concept: Identifying inefficiencies and fair value gaps can help in predicting price movements.
   • Example: In a trading session, if there’s an inefficiency in the NASDAQ that gets traded back into and then rallies up, traders can use this information to anticipate further price movements. For instance, if a bullish breaker is identified, it can signal a potential upward move, as seen when the NASDAQ retraced up 20-30% on its range and then continued higher [7].

These examples illustrate how understanding the behavior of the NASDAQ 100 and its relationship with other indices can provide valuable insights for trading decisions.