Another 2-Hour Chart

Here's yet another example of what you can do with 2-hour charts - Again it is AKS but what I wanted to show you was a simple three-pronged set-up.


What you see here is an RSI(2) < 2 coupled with a tweezer bottom (the black diamond below the third candle informs that formation) coupled with an S1 pivot point.

Note that a purchase on the tweezer bottom candle - say at the cross over on the S1 at 29.88 and this morning it hit 31.60. That would have been an excellent return for a couple of days of swing trading.

TAM - A Pivot Point Lesson

There were a whole slew of gap-ups on Thursday but this one, TAM, really stands out for two reasons.

On a dull day you often get two moves. They could be two moves down, of course, or one move up and one move down or reverse, or. as in the case of TAM. two moves up.

It is here where Pivot Points earn their living.


The chart shows a conventional gap up and Return to 4(EMA) play in the first hour. The fourth candle crosses the R2 pivot and is where the trade begins. A bit later it hits R4 at 26.03 and you could take your profit off that "cathedral of dead money" (9th bar) you see just before the long red bar down. If you kept this one on your screen though you could take a second bite of the apple at 14:45 when it once again ascended through 26.03 and came to rest with a double steeple at 16:00.

This trade was completely informed by the pivot points.

Hey Kids - Who Wants To Go To Wendy's?

Nobody!!!

Think again - this stock is showing some leg and it may be a little mature but it could take you for a ride that you won't soon forget. (Enough - the visuals are killing me).


And here is how it looks in a different aspect -



Good old pivot point trading. I think that this stock could get back to 33.50 in a short time and I'm pretty sure I'm going to add it to my trading portfolio today.

Return To 4 Part 1

As we will see the “Return to EMA 4” set-up doesn’t have to stop at EMA 4 it only has to return to at least EMA 4. While it always gets there sometimes it overshoots.

The set-up is simple – a stock price goes up abruptly in the first 15 minutes either as a gap up or as a straight shot higher from the previous day’s close. Here is an example in Goodyear (GT).


Note how Goodyear jumped up at the open and then slid sideways until it made contact with the EMA 4. At that point it printed a spinner (indecision) and on the very next candle made up its mind and away it went.

But how can you be sure – here is LPL


– same basic scenario – gap up, slide sideways down to EMA 4 and then start to go up but then flame out and go nowhere.

Well one way is to use the pivot point method with the Return to EMA 4. Here is GT with the pivot points.


You can see how it came back to the pivot point and then took off from the pivot point. So let's add a rule – must be in contact with one of the pivot points before a trade can be taken.

Here is LPL with the pivot points -

– and you can see that it is already above the second resistance and once that high there is no need to take the trade.

As I said in the introduction the price doesn’t necessarily have to stop at the 4 – it can continue on through to the EMA 21. Here is FRPT –


But look at FRPT with its pivot point –


Once more it hits the pivot and takes off. This time it comes back to the pivot once more before it finally makes the second pivot. I’ve also noted on this chart where a good spot for the stop loss might be – and that would be the next lowest pivot point.

One more example of going through the EMA 4 and this time it settled on the EMA 8. Here is KNOT –


And here’s KNOT with its pivot points


I had to annotate this chart with Midpoint High which is a valid pivot point that occurs half way between the actual pivot point itself and Resistance 1. And that is where KNOT chose to make its stand (or where the traders decided to start buying). You can usually "eyeball" midpoint high and low on the chart - it doesn't have to be precise.

I get my gap ups with a filter that I named “gap up” but that’s only because I’m not very creative. Prophet.net has a filtering capability that I can use but I prefer using Stockfetcher (even though it is 20 minutes delayed) because then I can write my own set-up and not just accept what the Prophet guys think I should use. The fact is the 20-minute delay is good (for me) because it keeps me from entering trades early in anticipation of what might happen rather than what actually happened. And yes I could probably find a better piece of software but this works for me, is reasonably priced, and I enjoy the little bit of work it takes to make it all come together. I am truly a hands-on kind of person – I like to see things working and not rely on some magical black box approach to trading.

Part 2 below has a few more examples for you to examine as well as a potential use for that pre-market data.

Return To 4 – Part 2

In part 1 we introduced you to the concept of Return to EMA 4 using pivot points. A lot of people use the return to a moving average approach but most use the MA 5 instead of EMA 4. I’ve never done any testing of this - I just believe that the EMA approach is superior because it is closer to reality. Here are some more examples –

First we have JCOM.


Here we had a drop through to the EMA 21 and an immediate rebound to form a crossover. That in itself would have been sufficient but here is JCOM with its pivot points –


In this instance it came back up through the pivot point itself. These are 15-minute charts so you could have taken this trade as soon as you saw the rebound occur at 27.95 or so. An hour later the price bumped up against resistance 1 and started printing steeples. You all know how I feel about those. I also annotated this chart with midpoint low, which is halfway between the first support and the pivot point. That would have been a good place for the stop loss.

Next we will review TTWO.


This one gapped up and then slid back to the EMA 4. Did it hit a pivot point?


The answer is obviously “no” so we would pass on this stock.

And last, but not least, we have one from this morning – SIMO. I only wish that I’d had this one.


You can see that it gapped up and then immediately came back to EMA 4 only to rebound strongly and form a crossover. Did it hit a pivot point?


Absolutely - and then it took off. I printed this chart and the previous one early - this stock just kept going from here currently 25.79.

But there is one more chart option I want to show you on this one – an option that you can also use to help inform your trades – here is the pre-market.


You can see from the pre-market that this stock was being traded with great exuberance. When that carries over to the regular hours it is a thing of beauty.

A gap-up like this can work in just about any market. It is just a matter of getting a set in a price range where you can buy in bulk and wait for the set-up to find you before you commit your hard earned cash. When you couple the Return to EMA 4 with the pivot points you get a very powerful trading tool.

The "Return to EMA 4" set-up is not "technical analysis" – it is a trader’s observation and, as such, it is based on real-time price action which, when coupled with TA, makes it especially potent.

BOB - A Reprise

Bullish Jim mentioned that he made a little yesterday during lunch time playing QID and so I went to take a look. And indeed QID was in the BOB formation. That is annotated on this chart. And I’m repeating the methodology here both for any new readers and as an update for some of my old readers who may have forgotten the pattern.



Now that is the only way a BOB is defined. If you look at the three candles just before the three I used to describe it you can see a similar but not quite the same pattern. That is not a BOB - only similar - and you can see that the stock continued to go down. Only the real BOB has a 68% probability of a rebound. Of course this BOB had a bit more than that because of the fact that it had descended through the second support level.



That lends a whole new amount of probability to the possibility of a rebound (probability and possibility in the same sentence - what a weasel worder).

Then the third piece of goodness associated with this particular BOB was the fact that the RSI(2) was less than 2 and had been for awhile. That is indicated by the purple color of the candles. I set up Quote Tracker to color them purple when the RSI(2) was less than 2.

So here is a BOB that is supported by other pieces of technical analysis and if you saw it and didn't trade it you lost an amazing opportunity to make some cash.

One other point I'd like to make - BOB isn't TA - it is a "trader's observation" and there is a difference. Technical analysis is based on price manipulations in some manner such as RSI or Pivot Points or Moving Averages of whatever kind - the "BOB" on the other hand uses price in the raw as it is happening now. BOB then is more up to date than is most TA. When BOB is coupled with TA it becomes extremely powerful.

Another Pivot Point Method

One of the best methods of determining entry and exit points on a trade are pivot points. Here is another way that I use pivot points to inform me of the probability of a trade's likelihood to succeed.

This is a pivot point cross method -

This is an easy enough program to write in Excel (which is one of my primary tools - because I'm not frugal - I'm cheap).

What you do is simply find a sequence of pivot points, take a 4 period average of the pivot point and a 4 period average of the closing prices (simple moving average is best in this regard) and plot them together. When the average cost crosses the average pivot you buy you have the makings of a buy-able stock.

Because I generally only need a few months of data I usually get the data set for this from the NASDAQ site. Go to their charts page for any stock and right click on the page and you will get one-year's worth of open-close data in a separate window - copy that and paste it into your Excel spread. It takes but a minute and you will have a handy set of raw data to work with.

I trust you can find the formula you need - you only need the pivot point itself and that is simply (high+low+close)/3 so that is simple enough.

Coincidentally (not) this is GLD and GLD will feature prominently in my next post. Note from the chart - GLD isn't signaling a buy just yet.

Day Trading with the Pivots

This post is going to knock off a couple of questions that some readers have posed.

Question 1 - Do you find the Pivot Points contained in Quotetracker to be useless relative to stocks whose opening price gaps-up? Short answer - no - I've used pivot points for a number of years (although I've gotten better with them in the past year than I was before - practice practice practice) and have no issues with the ones generated by Quote Tracker even on a gap-up stock. There are two ways to play gap-ups with pivots - first - wait for the stock to return to the pivot point (i.e. close the gap) and play from there on the rebound or second - play between R1 and R2 or mid-point high (which you can estimate using the EMA 4 or 8). If a stock gaps much beyond R2 I generally don't play it because I've learned that most of those have already blown it for the day.

Question 2 - Have you ever tried Camarilla Pivots? Are they any better/worse than normal pivots? My quick answer was I hadn't but I would look into them. The two figures below show some of the variances using a real trade that I took this morning.

I was out at the open at an appointment and didn't get back to the screens until about 11 A.M. I got my initial screens set-up and the NFI chart came up because I was using it to demonstrate something for Dogwood. I noticed that the price was coming back to the pivot point (I had it on a 4-minute frequency - I changed it to make it less cluttered for this demo). I said to myself - if it bounces off the pivot I'll take a trade - it did and I did. A little before 1 P.M. I closed the trade - right after it went over the R1.



Ordinarily I wouldn't have taken this trade except that it was there and I didn't have anything else set-up at the time. As it turns out I didn't have to sell it off when I did - it went back up through R3 and in fact I expected it too - but I had planned to sell it at that time and so I took the profit and ran. So that's a good example of how to play the pivots on a gap-up. You wait till it hits resistance and comes back. As far as gap-ups coming back - they don't always do they just mostly do. We call those Return to 4 or Return to 8. This one went a bit farther than that but you can see that the EMAs 4 and 8 are both about mid-way between pivot and R1. Imagine that - I don't make this stuff up folks - I really trade.

Here is how this trade looks using Camarilla pivots.



You can see the variances - first the pivot point is exactly the same - but H3 is just 4 cents away (on this chart - sometimes you can't even find it). But the variance between pivot point and H4 is closer than the normal pivot point and R1. I find that consistently from chart to chart and I don't like it. Here is why - most traders who are using pivot points are using the same old fashioned sets that I am - therefore they are watching the same old targets that I am. You should too - that's where the action is.

Now it could be that Quote Tracker doesn't have a correct formula for converting to Camarilla pivots but I doubt that. Either way I think I'm going to stick with what I know and understand - it seems to work - don't you think?

Thanks to Habben - he gave me a reference to Woodies club - and I guess the inventor of Woodies pivots is now making a living teaching others to trade - and that's good for him.

Tweezer Bottom

A reader wanted to know the code for "tweezer bottom" - here is what I use on Quote Tracker

If bar low = bar low[1] and bar close > bar open and bar open < ema(21) set color to $70106D

The color is kind of a purplish black - I use an arrow under the candle to point it out. I like using this one on 4 minute charts but it works well on 15 minute too.

Here is an example - you can see where PAAS put out the tweezer bottom on the 4 minute charts -



You can see the little arrow on the chart.

A bonus indicator is also being shown - the lines are Pivot Points. You can see where PAAS bounced off of support 1 and ran right up to its Pivot.

Pivot Points - More Examples

These examples are for swing trading purposes. A swing trade is a trade that is normally taken over a period of days. Pivot point calculations can assist the swing trader in determining entry and exit points for the trade.

Step one – select a list of stocks you believe you would like to trade. In other words you don’t normally use the pivot point to find the stock – you use the pivot point to assist you in trading the stock.

Step two – calculate a set of pivot points for each stock selected in step one. Use the previous week’s high/low/close data for this purpose.

Step three – wait until one of your selected stocks crosses a support pivot point level – either S1 or S2 or midpoint low.

Example 1 – BIG. This is a stock that I identified in a post the other day from an article I read in Notable Calls. Here is how it behaved on Monday and Tuesday.



You can see that it opened and dropped right to S1 where it printed two Doji one of which being a higher low. A little while later it rebound from S1 and went over the course of the next two days to nearly R1 where, what else, it printed two Doji.

Example 2 – BLG. An old friend – and you can see it more or less did what BIG did.



Example 3 – MDRX. A stock I played last week and dropped out of after a small gain. Should have had it on the radar this week. Not quite all the way to S2 but to the midpoint between S1 and S2 which is just as good. You can, of course, wait till it crosses S1 (and note how it lingered there waiting for the traders to catch up. Then it went to the PP where it lingered some more and then it went to MPH. Will it go higher? I don’t know – today will tell.



Example 4 – QQQQ. I’m currently holding some from just above MPL which is where it is right now. I think it rebounds today and goes to MPH at least.



Example 5 – AMD. Some readers are talking about this – here is how it looks in Pivot Point View. S1 to MPH + already this week and on its way back. If it crosses MPH again this week it is probably going to R2 which is 17.93. If it goes back to S1 - then it starts all over again. Such is the swing trade world.



There you have it – five crisp and recent examples of possible swing trades using pivot points. The one thing you have to notice is the small amounts most stocks move from S1 to R1. This, of course, is a function of the initial price of the stock. The less costly the stock the smaller the expected move all things considered. And the word is “expected” there are no guarantees in this business.

And as a last word - you couldn't help but notice how all of the stocks up there, selected more or less at random, have a similar chart pattern. What that means to you is that if you pick a stock to watch and it starts hitting S1 and moving up there is good reason to believe that your other stocks are also hitting S1 and moving up. Then your only problem is picking the ones to play. And how do we do that? ATR is Volatility.

Now for your pleasure here are two sites that will help you calculate pivot points. Since you still have to enter the initial HLC values and then transcribe the results somewhere else you are probably better off doing it with an Excel spreadsheet.

pivotpointcalculator.com

Stepney Futures

Pivot Point Example

I just remembered that I promised an example of a pivot point trade and haven’t provided it yet – lucky you guys – here it is. I’m using KKD because it is the chart I happened to be looking at this evening when the promise resurfaced in my head.

The first thing you have to do is generate the pivot points – I showed that calculation to you yesterday. In that post I also mentioned that for swing trading (across several days) I like using the previous week’s high/low/close and for day trading I like to use the previous day’s values. For KKD in this post we are day trading so I generated the pivot points as follows –

R1 – 12.45; MPH – 12.16; PP – 11.86; MPL – 11.70; S1 – 11.54.

The MPH and MPL are simply the midpoint high and midpoint low and are found by finding the midpoints between the PP and R1 and the PP and S1. That’s pretty simple. The MPH and MPL are used as checkpoints on the way up or down. They are used for positioning stop loss. Now look at the following chart – I’ve annotated the appropriate points (as well as I could).




The trade is taken at the pivot point +/- 10 cents. You can see by the red dotted line on the chart that the previous day’s close was about 12.12 so the pivot point is located below that level. When KKD opened it gapped up and then dropped instantly with heavy volume. The next candle showed a higher low so we could probably say that the first drop was just panic-based selling reflecting the market’s opening gyrations and was truly meaningless. Take the trade at 11.94 because if it didn’t drop through the pivot point at this time it probably won’t for awhile. Set your stop at the MPL, which is 11.70, and not shown on the chart for obvious reasons.

Then the trade takes off. Note that when it hits MPH it flattens out and then takes off again from that point. That is expected at the MPH. For the regression-to-the mean guys you can see that the EMA 4 was running far away from the EMA 21 and by the time the price broke over R1 it was pretty well exhausted.

You have two choices here. People who day trade for a living realize that the stock will probably rebound off the EMA 21 (or MA 20) and continue the journey (after all this stock has been going up for a month now). So choice one is sell right after it hits R1 and take your profits and run. Choice two is reset your stop at MPH and wait for the rebound. In this particular stock on this particular day it did rebound but closed right on R1 so either choice would have garnered the same amount.

What if it went through R1 and kept on going? Then you set your stop at R1 and play it to R2 or to wherever it decides to top. Most often however R1 is kind of the limit for a day trade.

One of the nice features of Pivot Points is that they give price a context. You are not always trying to guess the next move because most often the pivot point is controlling the outcome. Isn’t that nice?

Pivot Point and the Q’s

Generating the pivot point is fairly simple – you sum the high, low and close of the day and divide by 3. We’ve discussed the pivot point before in regard to using it for determining entry and exits for trading. This information is widely available on the web and I don’t want to re-cover that ground at this time.

What I want to discuss today is a method for using the pivot point as a means of determining overall trend of the market and as a timing method. Shown below is the last 170 days or so of the QQQQ ETF annotated to show a variety of features. The fact that the blue line is the pivot point and the red line is the average of the pivot point shouldn’t bother you in the least.



You can see clearly that you can use the pivot point and the exponential moving average as a means to determine long term trend as well as using it for determining buying or selling points.

If you want to do major buy or sell events there are two things you need to watch for – first that the pivot point crosses the 20-period exponential moving average and second – that the 20-period EMA confirms by turning in the direction as the pivot point. Once the turn is made it stays in effect for quite some time. Sometimes areas of congestion can be related to earlier activity in the stock. These are shown by drawing lines from one side to the other. The reason for this is that battles have already been won or lost in these areas and wherever there is a lot of congestion there is generally a lot of volume. That means that sometimes people have been trapped in the trade for a long time and now just want to get out. Consequently a lot more buying or selling pressure is put on the market. The short side players can see this too and they begin to take advantage of areas of perceived weakness. Once the area is broken through however the shortists help in its ascension by panic covering.

One area is annotated as the primary support/resistance. That is because this is where the descent was made some months ago and it represents a near term high of the market. However once the QQQQ broke out of the area of primary support/resistance it began going into new territory for this year. In the last 20 days or so it has begun once more to congest and the 20-period EMA seemed to be getting ready to roll over again. The following diagram is a cut-out of the last 20 days.



Instead a bull pennant formed and it is possible that the last two days signify a breakout from the pennant. The 20-period EMA seems to have resumed its upward trend. I think that if you are short the Q’s at this time you might consider covering until the actual trend is revealed.

Why, you ask, use the pivot point? Simple enough I reply – it shows “bottoming” more clearly than does the raw close by itself.

Look at the area of the long term chart marked false turn. Then look at the area marked real turn. Market bottoms are most often characterized by higher highs and higher lows, but they are also periods of indecision. Note how the points cluster together in the real turn and how they remained fairly constantly spaced in the false turn. You can see this again in the top right corner. That’s why I say it is of the highest probability that the Q’s are going higher.

Remember nothing is certain in the stock market and any event good or bad can cause the bulls to scatter and the bears to appear.