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 MoneyShow’s 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 frequently use 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 frequently give credit to its creator, Joe Granville.
In these trading lessons, 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 now discusses them in his latest book, Mastering the Stock Market: High Probability Market Timing and Stock Selection Tools, published this month 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)
NEXT PAGE: What the Pivot Indicates
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.
I am not aware of any technical analysis programs that currently include quarterly pivots in their standard packages, but I expect this to change next year. In my charts for this article I have manually entered the quarterly values in MetaStock.
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
The high in January 2010 was $115.14, which was only slightly below the monthly R2 at $115.17 (point 7). By the end of the month, the quarterly pivot level was broken and the next week SPY reached the quarterly S1 at $104.60 (point 8), the low as $104.58.
By the middle of February, the SPY was back above the quarterly pivot. Just a month later, the quarterly R1 at $115.66 was overcome and the high that month was $118.17.
The SPY opened the 2nd quarter of 2010 at $117.80, which was above the new quarter’s pivot at $113.41. By the end of April, SPY made a high at $122.12 (point 9) that was just below the quarterly R1 at $122.25. The flash crash on May 6 took the SPY back below the quarterly pivot and the S1 at $108.16 was also exceeded. The 2nd quarter low was $107.15 but this was still well above the quarterly S2 at $99.32, point 10.
Of course, the same methodology works on any market, and next, I would like to take a brief look at crude oil from the last quarter of 2011 through the 2nd quarter of 2012.
Crude oil opened the 4th quarter of 2011 at $78.92, which was below the quarterly pivot of $86.15, so going into the quarter, based on the pivot analysis, the trend was negative. On October 15, crude oil closed above the quarterly pivot (point 1). As I had discussed on October 11 Has Crude Oil Finally Bottomed?, the OBV had broken its downtrend, line a, and the same week crude oil closed above it’s quarterly pivot (point 1).
With crude above its quarterly pivot the focus was on the quarterly R1 at $96.60, which was exceeded in the middle of November as the high was $103.37. This was well below the R2 at $111.06. The pullback in the latter part of December took crude oil back to $93.31 (point 2), but it held above the monthly S1 pivot support at $91.99.
Crude oil opened 2012 at $99.70 solidly above the 1st quarter pivot at $92.38. Crude oil prices drifted lower in January, but bottomed in early February at $95.44. This was just below the monthly S1 at $95.87. On February 23, the monthly R1 at $109.81 was tested, and four days later, was exceeded as the high was $110.55, point 3.
Crude oil opened the 2nd quarter of 2012 at $103.27, but violated the quarterly pivot at $103.00 during the first trading day of the new quarter. For the next several weeks, crude traded above and below the quarterly pivot. Crude surged to a high of $106.43 on May 2, point 4, but then reversed to close the week sharply lower.
The weekly OBV had been deteriorating since late March as it had broken its uptrend, line b. As crude oil was peaking in early May, the OBV just rallied back to its now declining WMA, which was a sign of weakness.
I plan to start regularly providing the quarterly pivot data in my daily stock column so I wanted to look at Apple Inc. (AAPL), which despite its recent slide is still a barometer of the tech sector.
I would like to focus on late 2011 when AAPL was in a trading range that was contained for the most part between quarterly R1 at $418.44 and the S1 at $348.60. As 2012 started AAPL opened at $409.40, which was well above the quarterly pivot at $395.31.
NEXT PAGE: More Examples of Pivot Use
The stock market and APPL rallied sharply and with the mid-February high of $526.29, it had exceeded both the R1 and R2 quarterly resistance levels. The 2nd quarter open at $601.83 was above the quarterly pivot at $546.55.
However, by the middle of May, this level was broken (point 2) as APPL had a low of $522.18. The following week, AAPL closed back above the quarterly pivot level, suggesting that the intermediate-term uptrend was still intact.
On July 2, 2012 APPL opened the new quarter at $584.73 (point 3), which was just barely above the quarterly pivot at $583.39. This pivot was violated for three days late in the month in reaction to their earnings report.
APPL opened the following week back above the quarterly pivot, and in three weeks, exceeded the R1 resistance at $644.60. Just five weeks later AAPL had a high of $705.07, which was extremely close to the R2 at $705.21. At the end of August, I had come up with a target in the $709 to $722 area, using starc band and Fibonacci analysis.
By the start of the 3rd quarter, AAPL was already declining as it opened at $671.16 and shortly thereafter dropped below the quarterly pivot at $647.00. Right before the election, the S1 quarterly support at $590.07 was also broken as APPL made a low in mid-November at $505.75. This was just slightly below the S1 support at $513.04.
Using the close at $532.15, the quarterly pivot for the 1st quarter of 2013 is at $580.99. This number will change before the quarter is over, but for now is a level to watch.
With so many years of using pivot points, John Person has developed his own unique brand of pivot point analysis. By using his own proprietary methods to analyze the state of the market he comes up with his predicted levels of pivot support and resistance.
If the state of the market is analyzed to be strong, then the predicted resistance may be the R2 instead of the R1.The chart of the Spyder Trust (SPY) covers the period from early 2006 through early 2008.
The SPY spent most of the 2nd quarter of 2006 below the quarterly pivot (blue) and began the 3rd quarter also below the pivot line. For that quarter, the software predicted that the S1 at $122.12 was the most likely area of support (green line).
The low in the middle of July was $122.39, and by early August, the quarterly pivot line at $127.44 had been overcome. The predicted resistance for the quarter (in red) was the R2 at $137.87. The price action was strong in the 2nd quarter as SPY closed near its highs.
The 4th quarter opening was well above the pivot at $129.33 and the predicted resistance level was at $141.33, which was the R2 level while the R1 was at $137.45. The predicted resistance was overcome at the end of the 4th quarter as the high was $143.24.
The SPY continued to make higher highs throughout the first two quarters and peaked at $156 in July, which was just below the R1 at $156.25. Those of you who remember this period will recall that the selling was quite heavy as the quarterly pivot was violated before the end of the month.
NEXT PAGE: Quarterly Pivot Levels, Powerful Tool
By the middle of August, the SPY had reached the $137 level, which was just above the predicted support at $135.06. This area is highlighted by a circle (point 3). The market turned around sharply as many hoped that the bull market was not over. For the third quarter, the projected resistance was at $162.08, point 4. Of course, the SPY made its all-time high in October at $157.52.
One of nuances that John pointed out to me is that he looks for the change in a trend of higher and higher projected resistance levels to suggest a market is topping. By the 1st quarter of 2008 the projected resistance (point 5) had dropped to around $156, far below the third quarter high of $162.08.
John has also developed his own momentum system to complement his pivot point analysis, which he sells as an indicator package for many popular software systems. He was kind enough to provide a chart of the euro futures with the buy signals represented by the blue dots and the pink dots representing sell signals. I will leave it to the reader to examine the signals from his system and draw his own conclusions. (Of course I receive nothing from any sales he may or may not make).
I feel that in order for one to have the confidence to use any technical tool or method, one must do enough work on one’s own to become convinced. I had suggested the euro futures since it is an important world market, and I knew from the Commodity Traders Almanac, which is co-edited by John, that it has shown a very consistent seasonal pattern in early January.
As they discuss on page 16 of the book, “selling the euro on the third trading day of the New Year and holding for 24 trading days was profitable 11 out of 13years.” I asked John how he might incorporate his quarterly pivot analysis into this seasonal pattern.
By using the data for this quarter up through Wednesday December 12, I calculated the quarterly pivots for the 1st quarter of 2013, which are:
In the Almanac, the euro’s strong tendency to rally for the last two months of the year is also discussed. Given the current quarterly data, John said he would be looking for a rally up towards the 1.3257 level, with a first target of 1.2775. As for a stop, he would typically use one above his monthly predicted resistance level.
Regular readers will know that while the seasonal statistics and tendencies sound good, I always need to see clear technical signals that a market is topping or bottoming out before a trade is taken.
I think these examples will convince you that the quarterly pivot levels can be a powerful tool, and I would suggest combining them with monthly levels. It is quite easy to set up the formulas in Excel for the markets you are watching until these levels are more widely available.
I find that when the pivot levels coincide with the starc band and/or Fibonacci levels, it can give you a great degree of confidence in the level of support or resistance. Of course, one must also look at the volume and relative performance analysis.