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Trader's Corner

Pivot Points

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In answer to some correspondence from an OI Subscriber, I said in my last Trader's Corner article (Wed, 10/11) that in technical analysis terms and definitions the topic of 'pivot points' was not a 'defined or well-defined subject'; i.e., there is not a generally accepted definition of what a pivot point is, how you determine it and how you use a pivot point in trading.

However, my take on this and any confusion I had on the topic, was due to the fact that our Subscriber and others are following a specific method suggested and devised by a Commodity (Futures) Trading Advisor (CTA) named John Person. He has, as I said, a particular METHOD of determining pivot points in the futures markets, and by extension, other markets such as stocks and indexes. I will describe his method/formula for determining 2 support and 2 resistance levels for the coming day, week or month. Sometimes 3 resistance and 3 support levels are determined.

The calculated levels of support and resistance, for the day, week or month ahead, offer the same advantages as projecting any likely support or resistance levels. If valid, such levels or areas, will be an area where there's an advantage in buying or selling; i.e., buying in a perceived support area will find other buyers coming in, the market will rally and you will profit by purchasing at or near the pivot point; selling at a level or in an area that you perceive or hope offers 'resistance', also finds others selling in the same area, thereby driving the price down and leading to a profitable trade in a short or put position.

I like many have heard the term 'pivot points' quite a bit and figured that they relate to possible price action. Like many traders no doubt, I wasn't familiar with Person's pivot point formula. Moreover it does take some doing to calculate the support and resistance numbers unless you have it programmed into a spread sheet, or the formula is part of a charting application's indicators; I understand that eSignal has a study that calculates the numbers. John Person makes the point that professional traders like him and others who follow his method, especially floor traders, look at pivot points; that alone makes them worth paying attention to.

A pivot point is a computed number based on the High, Low and Close of the previous price bar, whether the time period for that 'bar' is an hour, day, a week or month. Using that pivot point number, traders calculate support and resistance levels which are considered to be price 'brackets' (like book ends) for the current time period.

To find the pivot point number used to determine current support/resistance levels:

Pivot Point (PP) = [High (H) + Low (L) + Close (C) divided by (/) 3]

The first resistance level (R1) = (PP X 2) - L
The second resistance level (R2) = PP + H L

The first support level (S1) = (PP X 2) - H
The second support level (S2) = PP - H + L

Professional traders may be buying as prices approach one or both support levels or sell as prices get near one or both resistance points. Knowing where these levels are helps them decide where to enter or exit the market; or, as Person suggests, where NOT to enter a position. These levels can act as boundaries that turn back price advances or declines, at least on the first attempt.

If prices do break through the S1 or R1 level, traders have new targets at the S2 or R2 levels. This is similar to fibonacci levels, where breaking above a 38% retracement (of the last decline) suggests a next target equal to a 50% retracement, which is anticipated to offer the NEXT level of resistance. Short-term traders may trade the expected move from one target to the next or they can wait until the market reaches the next target before entering or exiting a position.

Person suggests that the most important aspect of pivot point analysis is how prices REACT as they approach, or break through, these target areas. He also raises the age old question about other aspects of 'technical' analysis which is whether pivot point calculations work because they are a self-fulfilling prophecy; i.e., traders know the numbers and trade against those points so that's why prices react as they do in those target areas. This can be true, but in a way, so what? If they can give you insight into market action, you might as well use them; other traders are. Of course, pivot point analysis is a tool and a method that should not be followed blindly or 'mechanically'. They are just another trading 'input', one among a whole 'tree of indicators'.

Enough boring theory! I calculated the Resistance (R) 1 and 2 points and the Support (S) points 1 and 2 as determined by the above formula for the S&P 100 (OEX), the Nasdaq 100 (NDX), for S&P bellwether General Electric (GE) and Nasdaq bellwether Cisco Systems (CSCO). As well, since the weekly and monthly 'pivot' points, based on the prior week (week ending 10/6) and prior month (month ending 9/29) are also ones that get looked at, I have calculated the Weekly (W) and Monthly (M) S1/S2 and R1/R2 points on the OEX chart and note the numbers (alone) for NDX, GE and CSCO, following the OEX chart.

After listing the projected Support (S) and Resistance (R) points, we can compare this to price action over tomorrow (10/14 R & S), this week (Week Ending 10/13 R & S) and this month (Month Ending 10/31 R & S). I will not be writing this column NEXT week (10/18), but the weekly and especially monthly Support and Resistance levels can be observed next week during next week while I am away.

S&P 100 (OEX) Daily Chart:

'PIVOT POINT' RESISTANCE (R) Levels:

R3 calculation = 647.22
Monthly R2 = 635.95
Monthly R1 = 631.75 (Month Ending 10/31)

Weekly R2 = 635.95
Weekly R1 = 631.75 (Week Ending 10/13)

Daily R2 = 631.14
Daily R1 = 629.12 (10/12 only)


OEX PROJECTED SUPPORT LEVELS (AS SEEN ON THE ABOVE CHART):

Daily S1 = 624.74 (10/16 only)
Daily S2 = 622.37

Weekly S1 = 620.53
Weekly S2 = 613.51 (Week Ending 10/13)

Monthly S1 = 603.98
Monthly S2 = 587.94 (Month Ending 10/31)


NASDAQ 100 (NDX) PROJECTED SUPPORT (S) & RESISTANCE (R) LEVELS:

Monthly R2 = 1733.93
Monthly R1 = 1694.03 (Month Ending 10/31)

Weekly R2 = 1733.96
Weekly R1 = 1709.42 (Week Ending 10/13)

Daily R2 = 1715.21
Daily R1 = 1703.25 (10/16 only)
---------------------------
Daily S1 = 1677.65 (10/16 only)
Daily S2 = 1664.01

Weekly S1 = 1641.72
Weekly S2 = 1598.56 (Week Ending 10/13)

Monthly S1 = 1586.2
Monthly S2 = 1518.2 (Month Ending 10/31)


GENERAL ELECTRIC (GE) PROJECTED SUPPORT (S) & RESISTANCE (R) LEVELS:

Month Ending 10/31 R2 = 36.79
Month Ending 10/31 R1 = 36.04

Week Ending 10/13 R2 = 37.16
Week Ending 10/13 R1 = 36.65

10/12 R2 = 36.57
10/12 R1 = 36.37
----------------------------
10/12 S1 = 36.0
10/12 S2 = 35.8

Week Ending 10/13 S1 = 35.45
Week Ending 10/13 S2 = 34.76

Month Ending 10/31 S1 = 34.15
Month Ending 10/31 S2 = 33.01


CISCO SYSTEMS (CSCO) PROJECTED SUPPORT (S) & RESISTANCE (R) LEVELS:

Month Ending 10/31 R2 = 24.92
Month Ending 10/31 R1 = 23.95

Week Ending 10/13 R2 = 25.09
Week Ending 10/13 R1 = 24.59

10/12 R2 = 24.75
10/12 R1 = 24.57
----------------------------
10/12 S1 = 24.19
10/12 S2 = 23.99

Week Ending 10/13 S1 = 23.19
Week Ending 10/13 S2 = 22.29

Month Ending 10/31 S1 = 21.59
Month Ending 10/31 S2 = 20.20

GOOD TRADING SUCCESS!

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