Friday, March 16, 2007

Pivot Numbers

Daily Pivot = (High+Low+Close)/3
Three Day Pivot=(HighestHigh for 3days+LowestLow for 3days+Close)/3

3/15/07 SPX

These are numbers that can be used to determine the points of reference while watching the market today. Now today is option expiration, which could limit the volatility. That being said, these calculations can tell a lot about the direction of the market. One thing to watch is if yesterday's pivot was above the midpoint. When the pivot is above the midpoint, that means the market surely ended the day in the upper 50% of the daily range. When the pivot is below the midpoint, it would mean that the day ended in the lower half of the range. So yesterday's pivot being above the midpoint tells us that yesterday was bullish.

The second thing to look for is the position of the pivot in relation to the 3day pivot. Currently the daily pivot is above the 3day pivot. This means that over the past day or two, we have been in a buy mode. The buying could be short covering or new money coming into the market, it doesn't help us with where the buying is coming from. Along with the 3day pivot number and the pivot number, it is helpful to watch the difference between the two. As the market is in a trend, the difference can grow and grow, but as momentum of the trend slows, the difference between the two numbers should become less and less.

So yesterday the market closed at 1392.28, and the pivot is 1391.057. With the pivot so near the close, it will not take much of a down move to break down through the pivot. Currently the futures are down 2.80, so if we opened now we would be below the pivot number. In order for the market to rally today, we would need to get back above the pivot. The three day pivot is 1387.497, so we are still above that number, but it isn't that far away. With the down move we had earlier this week, the last 2 days have been a partial re-tracement of that bearish day. We have not recovered that down move, so the last 2 bullish days have to be taken in context. It wasn't a new high, just a recovery from an oversold position. The market is still bearish and the pivot and the 3day pivot provide great points to establish short positions. As we trade this morning, and the pivot from yesterday starts to act like a resistance point, use it as a stop in a short position. If we break above it, it can be used a stop for a long trade, but most things are looking to the downside. If we break the 3day pivot number, that provides another level to enter a short trade. Again, it should be used as a stop. Watch how the market acts when it trades close to these numbers. It will usually test them intra-day.

If the last 2days in the market have you feeling bullish and that we have sold off too much, take a look at a chart using a longer time frame. Below is a weekly chart, and it shows that we could move down some more without breaking the longer term trend, yet.

Next we will work on determining targets and price levels, along with an idea for a scan to find some stocks that should outperform the general market.

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