This is Pivotal (Part 2)
I first want to thank everyone who emailed me last week for the pivot point calculator. If you still haven't and want to receive the calculator, you can request it at brandon@tradingacademy.com. I apologize if I didn't type anything in my reply to your emails as I was inundated by the sheer number of emails (over 400 and counting!) I received and wanted to get the tool out as quickly as possible. I was so impressed by the response to last week's article (who knew I was so popular?) that I decided to write this follow-up article to expand on my use of the pivot point calculator in actual trading.
In your market travels, you have no doubt noticed that individual stocks tend to follow the broader market and the sectors. We have three major indexes to watch in the US Equities markets, the Nasdaq, the S & P 500, and the Dow. On any given day, one will lead the charge either up or down. If we identify that the leading market of the day is approaching support or resistance, then there is a high probability that the other ones will also turn and follow. In using my pivot points on the three indexes, I have a leading indicator of a possible turning point! I tend to use the Nasdaq 100 as the tech market Index rather than the broader Nasdaq Composite.
On Friday's charts, we see that the indexes were headed higher in the morning but then the Nasdaq 100 found weakness near the R1 point at 10:10AM. The other markets followed suit and fell to the pivot point level where they bottomed at 12:40PM.
Once off the lows the markets rallied (although weakly) until the S&P 500 put in a weak candle with selling pressure at its pivot point at 14:40. This ended the march to the upside and was a good exit point for any longs. I generally keep charts of all three markets with pivots open on my computer while trading.
When using these pivot points, it is important to remember this rule: Buy Near Support, Sell Near Resistance. If we are watching the markets lead our sectors, we can then trade long in sectors and stocks that are showing strength while the market is also showing strength and then reverse and short sectors and stocks that are weak when the markets hit resistance.
How do we identify these strong and weak stocks and sectors? Well, another rule I abide by is looking to the opening signal to stay on the right side of the trade. The opening signal is simply the change from the open. That is the difference between the very last trade price and the open price. If the stock has a positive change from the open, it is showing strength and I will only look for long opportunities on that stock or sector. If the change is negative then I will only short that stock. This is an error that I see many novice traders make, not my students though. :) They will try to short stocks that have a positive signal. While this may be profitable sometimes, you are increasing your risk by not trading with the trend. Not to mention, counter trends are short lived and offer lower reward with higher risk. Last I checked, we look for high reward and lower risk trades.
So, if the market is looking strong and moving up, I look to go long on stocks that have a change from the open that is positive and are in sectors that are positive.
If the market is hitting resistance or showing weakness, then I will look for shorting opportunities on stocks with a negative change from the open with negative sectors.
Hopefully, this will assist you in minimizing your risk and keeping you on the right side of the trade. I'll be trading this week from home and then off to London for the Pro Trader class on the 16th. I then go to Singapore for the Options class on March 1st and the Pro Trader class on the 8th. Until next time, may all your trades be green and your losses small!
Brandon (Trader B)
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As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his classes. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An OTA graduate himself in 1998, Brandon has been trading his own account since. Brandon taught for OTA in 1999 to 2001 before becoming a Realtor and Mortgage broker holding licenses in 15 states. Returning to the OTA family late 2005, he now balances trading, teaching and a real estate career.