Learn the “Pocket Pivot” Strategy
04/25/2011 3:00 pm EST
Chris Kacher, PhD, chief investment strategist of MoKa Investors, explains how he applies what is called the "Pocket Pivot" strategy in order to trade individual stocks.
I’m talking with Dr. Chris Kacher today about new buy-point strategies. Hi, Chris. So you’ve got a new one. Tell me about it.
Well, in 2004 and 2005, the markets were trading sideways in a choppy, compressed manner, and old strategies of buying base breakouts were not working very well, so I went back to the drawing board and created what I call the “pocket pivot buy-point strategy.”
That allows me to buy a stock early before it’s broken out of its basing pattern, and I identify price/volume signatures within the base that trigger the pocket pivot, and so when the stock does break out, I have a lower average cost.
So, in other words, you can buy once in the base, and then you buy once again on the breakout, and your average cost is somewhere within the base.
And then, as the stock moves higher, you have what I call “follow-on” pocket pivots, which allow you to buy a stock that is moving higher but is not extended.
In other words, there are stocks that are leading stocks—in any market cycle—that follow a certain rhythm around their ten-day moving average, and when I see a follow on pocket pivot around the ten-day, I add maybe a third, or a fourth, or fifth position to the winning stock.
Why did you choose the ten-day moving average?
It seems to work very well. I’ve used the ten-day since the early 1990’s, and I know it’s not something that a lot of people use.
In fact, back then, no one was using the ten-day. I think it seems like I was one of the first to actually employ it in my trading, but it allowed me to fine tune my entry and exit points in stocks.
Now, back then, I did not have the pocket pivot concept. I had the base breakout strategy, and today, with the pocket pivot, it allows me to buy stocks if I, say, missed the base breakout, I can still get on board that winning position as it moves higher because a lot of these stocks will give multiple buy points in the form of pocket pivot buy points as they move higher.
What’s another new buy strategy that you have?
The gap-up strategy. I’ve found that, again, in difficult markets like 2004 and 2005, gap ups often bucked the trend of markets.
In other words, you might have a sideways, choppy market, but a stock that gapped up often went higher.
Now, the stock has to measure out on a fundamental basis. It does have to be a leading stock on fundamental variables like earnings and sales, and also in its space, I prefer it to be a leader.
And then if it matches all those criterion, then I look at the technicals and I look at what the price/volume chart looks like leading up to that gap up point.
So it has to be constructive action. If I can check all the boxes on the fundamental level and on the technical level, then I will buy the gap up.
So now do you use the pocket pivot and the gap up in conjunction with cup and handles or have you put cup and handles into the toolbox?
Oh, it all applies. In fact, sometimes you get pocket pivots in the form of base breakouts. They coincide with base breakouts and those base breakouts may be from cup-and-handle patterns or from saucers, or it’s just cups without handles, and they all apply. They’re all legitimate basing patterns.
When you get confirmation from, say, maybe two or three of those indicators, does that give you stronger confidence in the trade?
It’s contextual to the markets. In some cases, yes.
I like to see that kind of overlap, but it’s not required. It’s not a requirement, and really what gives me more confidence in the trade is if the price/volume action leading up that buy point is very constructive.
It always goes back to price and volume, doesn’t it?It does.