Before the advent of computers and charting software, pit traders and market makers used this method to figure out where the markets might be heading. These days, it is part of most traders’ toolboxes, but technician Tom Aspray shows how one special time frame can spot key levels well in advance.
Currently if you ask any audience of traders if they have heard of or use pivot levels almost every hand will go up, however, that wasn’t always the case. I first remember hearing about pivot point analysis from the late Manning Stoller in the 1980s. He was the developer of the starc bands that I have frequently used in my analysis.
I have always felt it was important to give credit to those who originally developed or used a particular analytical tool. I still refer to the TRIN as the ARMs Index as it was developed by an old friend Dick Arms. My favorite volume tool, of course, is the on-balance volume (OBV) and I have frequently given credit to its creator, Joe Granville.
Often times, I either try to explain how I use a particular technical tool or provide my analysis on the markets. I restrict my detailed analysis of indicators to only those tools where the formula is fully disclosed.
In the mid-1990s, I published weekly and daily pivot levels for the cash forex markets to my institutional clients. At that time the formula was not widely distributed. I even recall that there were a few services that sold the pivot levels for a price. I concluded that the weekly levels were often not reliable enough for me and the pivot levels were not available in most technical analysis programs.
That changed in 2004 with the publication of John Person’s book Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks & Other Indicators. In the following years, he gave numerous presentations of his methods at The Traders Expos, and by 2007 pivot points were a common feature of pretty much every trading or technical analysis program.
I had never thought about doing monthly pivot analysis until I read John’s books and later found out that he had been using pivot point analysis for over 20 years. I was even more fascinated a couple of years ago when he let me in on the secret of quarterly pivot point analysis. It was something that he had never revealed publicly, and therefore, I did not incorporate them into my analysis.
John discusses them in his book, Mastering the Stock Market: High Probability Market Timing and Stock Selection Tools, published by Wiley. Therefore, I now plan on referring to them in my analysis.
In this trading lesson, I will review how I use them and then show you how John has incorporated them into his trading and highlight how they can be combined with one of his most reliable seasonal patterns.
The basic formulas are now well known and pivot calculators are readily available on the Internet.
R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) – L
P = (H + L + C)/3
S1 = (P x 2) – H
S2 = P - (H - L) = P - (R1 - S1)
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The pivot is the key level of support or resistance and the longer the time period the more important it becomes. One thing I have observed about quarterly pivots is that you come up with levels that are generally not derived from other methods. They also can give you a bias for three months of trading. When a market starts off a quarter above its quarterly pivot it has an upward bias, or if it opens the quarter below it, there is a downward bias for the market you are analyzing.
This chart of the Spyder Trust (SPY) covers the period from the last quarter of 2008 through the second quarter of 2010. The SPY opened on October 1, 2008, at $115.27, which was well below the 4th quarter pivot (line 1) of $119.36. By the second week of the new quarter, the S1 at $107.18 and S2 at $98.40 had both been broken as the low on October 10 was $83.58.
The SPY had a 4th quarter low of $74.34 and opened 2009 at $90.44, which was below the 1st quarter pivot (blue line) of $93.75. On January 5 and 6 (point 2), the SPY slightly exceeded the pivot level as the high was $94.55 and $94.45 respectively.
The following week, the SPY violated the prior five-week lows and once again the sellers took over. The S1 level for the 1st quarter was at $70.82, which was just broken the first week of March as the market was making its low. The SPY opened the 2nd quarter at $78.53, which was above the 2nd quarter pivot, point 3, at $76.25.
Therefore the bias for the second quarter was positive and first resistance (S1) at $85.40 was exceeded on April 9, 2009. This turned the focus on the S2 (red line), which was at $103.70. The 2nd quarter high was $96.11 and the SPY opened the 3rd quarter at $92.34, which was above the 3rd quarter pivot at $88.79.
The pivot level was broken for five days in July, point 4, as the low was $87. It is interesting to note that the monthly S2 for July was at $87.62, and on July 13, SPY closed strongly back above the quarterly pivot. Two weeks later the quarterly S1 at $99.26 was exceeded.
In September, as the quarter was drawing to a close the quarterly S2 resistance at $106.57 was exceeded and the next day the monthly S2 for September at $107.88 was hit as the high was $108.06, point 5.
For the last quarter of 2009, the pivot was at $100.21, which was well below the quarter’s open at $105.34. During the last quarter, the SPY failed to reach the S1 at $113.43 (point 6) as the high was $112.38. The SPY opened 2011 at $112.37, which was above the quarterly pivot at $108.82.
NEXT PAGE: Examples of Pivot Use