Preview Stock Prices Using Futures

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Feb 8th, 2013 | By | Category: Investor Education, Trend Playbook

“Futures.” The very word has been known to make stock investors shudder.

That’s an understandable reaction. Futures are volatile, and they’re fraught with hypothetically unlimited risk. Futures have been known to wipe out multi-millionaire professional traders… so, it’s no surprise amateur investors prefer to keep their distance from them. But they’re also one of the best tools you have to predict what’s going to happen with stock prices.

Today, I want to show you how you can easily use futures to see what’s about to happen in stocks, as well as what’s on the horizon for the economy…

First off all, let’s start off with a definition: A futures contract is an agreement between two parties to exchange a specified asset at a pre-determined date for a pre-determined price. Futures have been around since the days of Aristotle, providing a way for farmers to lock in the prices of their crops ahead of time, erasing some of the uncertainty of their harvest.

If a farmer wanted to lock in a good price on his wheat crop, for instance, he could pre-sell all of that wheat to a baker with a futures contract, and avoid unforeseen price swings in the wheat market. The baker benefits too, because he’s able to lock in his wheat costs for a loaf of bread this year.

Futures are still used by major growers, but they’re not limited to soft commodities (stuff you can grow) anymore. Today, there are futures available for everything from stock indexes to interest rates to orange juice…

But I’m not suggesting that you start trading orange juice futures like Eddie Murphy and Dan Aykroyd in Trading Places. Instead, I want to show you how you can use these financial instruments as a prediction tool.

Because futures are available for financial indexes, such as the S&P 500 or the NASDAQ Composite, we can get some early insights about where the market is headed. You see, futures trade outside of normal market hours — while you have to wait until 9:30 Eastern for the NYSE to open for regular trading, futures on major stock indexes are trading almost around the clock. That means that futures prices can give you a preview of the day’s open hours in advance…

This morning, the S&P 500 opened higher— but investors who were looking at futures this morning got a preview of today’s price action several hours in advance. In the real world, that sort of advance notice could be enough to tell you whether today’s going to be a good day to take on a new position, or whether a stop loss level is going to get knocked out. Having the extra time to prepare for a trade can be crucial.

To be sure, futures aren’t the only option for investors looking to get a preview of the day’s price action — pre-market trading can offer a similar glimpse at individual stocks’ likely behavior. Even so, because futures tend to be more liquid than most pre-market names, they’re a better indicator of what to expect.

Futures aren’t just good short-term predictive tools for stocks — they’re also a valuable way to preview economic data such as inflation.

Remember, futures got their start as a way to price commodities. Today, when people talk about the price of oil, gold, cattle, or timber, they’re typically talking about futures prices. Because commodities are directly related to inflation (increasing commodity/raw material prices means that you’re paying more for the goods you buy), they can be a good indicator of what’s going on with inflation…

So, if futures contracts for oil, timber, and silver are rallying, chances are that those increasing prices are going to get passed down to consumers and increase the rate of inflation. For income-focused investors, that’s an important observation; after all, high inflation eats away at the real yields you’re getting on stocks and bonds. (Of course, the opposite is true too.)

From stock prices to inflation, futures are the tool that can give you extra insights into the market. So, how do you actually use them?

While you can’t yet get futures data on popular sites like Google Finance, futures prices aren’t hard to find. If your broker offers futures trading, then they’re the best place to turn to get real time futures pricing data. Otherwise, a number of websites offer delayed futures prices for a number of different instruments (Bloomberg’s futures page is one example. StockCharts.com also offers free end-of-day charting for a number of different futures products here.)

Your preview of the market’s action may be as simple as opening your trading software, or logging onto your favorite financial site. It’s an effortless way to get advance notice if a major trading day is shaping up.

Whenever you’re planning on making a trade, I’d recommend sitting down early that morning and checking out what’s going on with E-mini S&P 500 Index Futures (if you can’t spot them right away, the ticker is usually ES or /ES depending on your data provider). If futures are pointing to an unusual open, you’ll have that much more time to plan your next move.

Even if trading futures isn’t your cup of tea, this tool can still provide a substantial amount of information to any investor. Whether you’re looking for a preview on inflation or just a jump on the morning’s open, you should add futures charts to your trading toolbox.

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Author Image for Jonas Elmerraji

Jonas Elmerraji

Jonas Elmerraji, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes, and a contributor to Agora Financial’s Trend Playbook. Jonas got his start on the fundamental side of the market, poring over financial statements and valuations to find sound investments – today, he specializes in blending fundamental and technical analysis. Jonas is a senior contributor to TheStreet.com, and has been featured as an investment expert in Forbes, Investors Business Daily, and CNBC.com among others. 

Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

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2 comments
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  1. Nice Blog, Good information about stock market, it is very informative
    and helpful. I always ready to read this type of blogs.
    Regards:

    stock future tips

  2. Thank you a bunch for sharing this with all folks you actually understand what you’re talking about!
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