Continuing from last week (go to the 'Trader's Corner' tab at the top of the OIN home page and scroll down to my 5/22 article) on the concept of various Pivot point
methods of estimating technical support or resistance, it's usually enough to project a single support or single resistance level above a central 'pivot', which equal the 3 'points'.
This method is rightly called a 3-point pivot calculation, rather than the added complexity of the 5-point method which calculates a second much lower support and a second much higher resistance. The wider parameters of the 5-point pivot is most often of most use in projecting ahead to the following week based on the weekly HLC (High, Low, Close) numbers for the week just ended.
To project a pivot point for the next 'bar' or trading period (e.g., hourly, daily weekly) simply involves ADDING the High, Low and Close (HLC) and dividing by 3. For example, yesterday's (Wed, 10/28/09) HLC in the S&P 100 (OEX) was 494.4, 486.3 and 486.5 respectively (I've rounded off to the nearest whole tenth). The sum of these 3 numbers is 1467.2; divided by 3 equals 489.1. Today's (10/29) OEX pivot point is then 489.1.
Generally speaking trade ABOVE a pivot point is bullish for whatever period and trade BELOW the pivot is considered bearish. Today, the OEX Opened at 486.8 and within a half hour was above today's pivot point; after one minor dip to 488, OEX keep moving steadily higher, closing at 496.05, a gain of 9.55 points.
Calculating a first level of 'support' and first level of 'resistance', based on the pivot point is relatively easy. The 1st resistance calculation (R1) = (P X 2) - L. 'L' here is yesterday's OEX Low at 486.3 as noted above. Today's OEX 489.1 pivot X 2 = 978.2 minus 486.3 = 491.9. Today's OEX high (496.3) was of course well above this first level or projected resistance. If a strong move above the pivot point is bullish, a decisive upside penetration of the 1st pivot (R1) resistance is more so.
To complete today's calculated 3 points, the pivot and first resistance and first support, the formula for the first Support (S1) is (P X 2) - H. 'H' here is yesterday's OEX high of 494.4. Calculating S1 is beside the point for today as OEX never got much below the pivot. Just note the upper resistance number uses the prior bar's LOW and the lower support number uses the prior bar's HIGH. Think opposites.
The calculation for the WIDER support and resistance levels will add two other calculations and will next be shown in calculating this week's first and SECOND support and resistance levels for OEX, which makes use of the 5-pivot method; i.e., pivot plus S1 and S2, plus R1 and R2 equal 5 points of interest for this week's WEEKLY pivot point calculation.
First, I'll just note that some trader's will calculate the next trading period's pivot point by also making use of the Open of the prior period in addition to the High and Low; i.e., OHLC (Open, High, Low, Close) is used. With this slight variation, OHLC is added and divided by FOUR, rather than three. In the case of the OEX, yesterday's OHLC was 493.2 + 494.4 + 486.3 + 486.5 divided by 4 equals 490.1 for today's pivot point.
Not a lot of difference in these two calculations. The R1 (first resistance) and S1 (first support) is the same formula as already described; only the 'pivot' point is different based on whether you use OHLC or HLC. Sometimes adding in the Open will be significant in terms of the pivot value, but not too often. For a daily pivot calculation it's simpler to use HLC and I tend to use these 3 numbers and just calculate the R1 and S1 numbers. For a weekly pivot calculation I'll often add in the Open.
For the OEX weekly pivot point plus projected first Resistance and first Support for THIS WEEK, I'll use last week's OHLC for OEX, as follows:
For the week ending 5/23, OHLC for OEX was 503.1 + 509 + 497.2 + 500 = 2009.3; divided by 4 equals 502.3 and this becomes this week's OEX pivot point. Even with today's sharp rebound, OEX has not traded above this OEX weekly pivot. Therefore, on a weekly chart basis, OEX hasn't yet cleared the number (502.3) that would be considered bullish for this week. Stay tuned for tomorrow!
Suppose however, you were overall bullish on the OEX as I've been and looking at sell offs as buying opportunities. You would be therefore be looking at various ways of looking at support and the S1 level would be of interest, among possible other ways of seeing potential support.
Going back to the formula of S1 = (P x 2) - H with 'H' High being last week's WEEKLY high for OEX I make the following calculation for first support: 502.3 X 2 = 1004.6 - 509 = 495.6. I've noted the weekly S1 number on the OEX daily chart below. With yesterday's low at 486.3, the weekly S1 number wasn't a lot of help in pinpointing support on this recent sell off. What was a significant help (in pinpointing support once again) was the 50-day average as you'll see on the chart.
For the weekly OEX first Resistance (R1) we have the calculation of R1 = (P x 2) - L or 502.3 X 2 equaling 1004.6 minus (-) last week's OEX Low (L) of 497.2 gives 507.4 as this week's OEX 1st weekly Resistance (S1). We're not there yet although this week's OEX high was 504.6.
Since OEX knifed through the first Support based on the pivot formula, we're brought to the second calculation for what would be an even LOWER support (S2) based on this week's OEX pivot point but making use of a 5-point pivot point system. Besides S1 = (P x 2) - H formula, for S2 we add to this calculation: S2 = P - (H - L) = P - (R1 - S1).
The above for 2nd support S2 may look complicated but not so much if you just follow the steps like in high school or collage math/algebra. This week's OEX pivot is 502.3. Therefore we have 502.3 - (last week's H at 509 - last week's OEX L at 497.2 or 11.8) to equal 502.3; subtracting 11.8 equals 490.5 (a new 'pivot'). From this subtract the result of taking 495.6 (S1) from 507.4(R1), which also happens to be 11.8. Subtracting 11.8 from 490.5 equals 478.7 to give us an S2 or second/lower support. With this week's low at 486.3, our second support, based on the 5-point pivot method hasn't helped pinpoint what we've seen so far this week with OEX, but does give us some broad parameters.
R1 or first OEX resistance is 507.4. The R2, second resistance calculation is R2 = P + (H - L) = P + (R1 - S1). Our weekly Pivot of 502.3 PLUS 11.8 = 514.1 (a new 'pivot') plus 11.8 equals 525.9. As you'll see on the daily chart below, this second resistance is quite far from today's OEX close of 496.05. Had this week been an overall rally week instead of an initial sharp sell off, this could have been a different story.
The WEEKLY OEX pivot (P), Resistance levels (R1 and R2) and Support levels (S1 and S2) are highlighted as follows on the S&P 100 (OEX) daily chart. The Weekly pivot point formula, both on a 3-point basis (i.e., P + R1 + S1) and on a 5-point basis (i.e., P + R1 and R2 + S1 and S2) were not overly helpful so far in OEX trade strategies this week. However, in terms of other technical considerations, the OEX again found support at its 50-day moving average. Moreover, today's strong rebound began, as it has on 4 earlier occasions since July, after a pullback in the 13-day Relative Strength Index (RSI) to a 'neutral' zone as also highlighted on the following chart.
The 'best' so to speak that can be said for today's OEX close in terms of our weekly pivot points is that the strong rally of today put OEX at its 5/29 Close back above first (S1) support.
The 3-point Pivot method, into which you can plug in daily or weekly (even monthly and yearly) stock or stock index numbers to evaluate the next day's or next week's, etc., trade is as follows:
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
The 5-point Pivot method, which adds a second support and second resistance calculation into which you can plug in daily or weekly (even monthly and yearly) stock or stock index numbers is:
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)
I mentioned in my last (10/22) Trader's Corner that Tom DeMark, a well-known market analyst and President of Market Studies, Inc. (and someone I worked with in the past in putting on trading seminars), uses several different formulas for computing a next trading period's pivot points. Tom's system uses the following rules to calculate support and resistance, based on whether today's Close was less than (<), greater than (>), or equal (=) to the Open.
LAST BUT NOT LEAST; FROM MY MAILBAG:
OIN SUBSCRIBER E-MAIL:
"Thanks for the (5/22) article on pivots. Wow! Out of curiosity I punched in some yearly numbers and was shocked. Maybe I shouldn't have been!
Guess what the yearly pivot for 2008 was? (2007's H = 1,576; L = 1,365; C = 1,468) The Pivot did seem to be powerful at 1,470 as 2008's high was ... 1,471."
GOOD TRADING SUCCESS!