DIA or Indu? Which To Use For Candlestick Charting
I just wanted to point something out today about using candlesticks on the Dow Jones Industrials because today is a good example of a common mistake I see people make in my opinion.
The top chart is a daily chart of DIA (ETF for the dow jones Industrials) and in the lower panel we have INDU. I think it's a mistake to use candlestick analysis on the INDU because all of the opens are unchanged... That's right, every open is flat and then once the components in the dow begin to open, the INDU will then move to reflect it's true value. So for example if the dow jones industrials are going to gap up on the open, INDU will first open unchanged and then rally. DIA is a much more accurate reading for candlestick charting. DIA will show the gap up.
Notice today INDU is a white colored bar and is almost a doji...but if you look at DIA you will see a completely different looking candlestick formation. This is not earth shattering news but it's something I wanted to share with you if you follow candlestick charts.. DIA is the better chart to look at when it comes to candlestick charting because it reflects where the dow jones industrials were really trading on the open.
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6 comments:
Wow, great pair of eyes and detective work! Thanks for sharing.
RedEyes
One source of inaccuracy in DIA is that it trades independently of the 30 stocks in INDU, meaning that it's supply and demand introduce distortions from the price of the index it's meant to track. While market-makers can arbitrage that difference, it still exists.
So neither DIA nor INDU is an accurate representation of the trading patterns of the 30 stocks they track.
Also, the index itself is a poor proxy for the tradeable market at the retail level, but that's another post.
I disagree... It's true that there are distortions but arbitrage will move things back in line quickly. The point I was trying to make is that DIA is a much better market to use your candlesticks on than INDU.
Disagreement is fine. I like it.
Another distortion introduced by the use of DIA over INDU is volume. The volume registered by DIA doesn't represent the volume of shares exchanged for the 30 stocks in the INDU. Indicators which key on volume, like CMF or OBV, will be distorted by this.
That I totally agree with..DIA volume does not reflect the volume that is actually in the market. But getting back to DIA vs INDU..I know DIA is not perfect but it is a heck of alot better to use for candlestick charting than INDU...That I am postive about.
So, summarizing:
we both agree that gaps don't exist in the INDU candle and that is one advantage of DIA - if gap analysis is a big part of your chart reading
we both agree that volume in DIA is misleading compared to volume in INDU
we disagree about the impact of supply/demand for the ETF and the ability of market makers to quickly and near-perfectly arbitrage the differences
sound about right?
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