Pivot Numbers

Daily Pivot = (High+Low+Close)/3
Midpoint=(High+Low)/2
Three Day Pivot=(HighestHigh for 3days+LowestLow for 3days+Close)/3

3/15/07 SPX
Pivot=1391.057
Midpoint=1390.445
3dayPivot=1387.497
Pivot-3dayPivot=3.56

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.

Hammer Time

This is a candlestick chart of the S&P 500. Today's action shows that after a strong sell off this morning, the market recovered nicely and closed very near the high of the day. This is shown in as candlestick with a long stem and a white body. This type of candlestick is referred to as a Hammer. It is usually a bullish pattern. What it shows is that the selling pressure that took place during the day was overwhelmed at some level and buyers took over. The buyers could be shorts covering their positions or new money coming into the market, the chart doesn't tell us that. All it tells us is that for the short term, the selling was met at some level by more buyers than sellers, and the market reversed.

A Hammer pattern is a great pattern to look for. Once a Hammer is formed, there is usually continuation, at least for the short term. If you were short the market, and the Dow was down 130 points you would be feeling pretty good. As the market selling slowed you might still be comfortable in your position. You start to become nervous when the market approaches the opening price for the day, and then continues to finish at the high. This is a short squeeze. When a market is oversold in short term, it becomes a likely candidate for some sort of short squeeze situation. The intensity and duration all depends on many factors.

At what level does it stop? Well, markets usually rally further than most people think are appropriate and sell off past levels that seem rational. What is the good news that caused the buying? Is the bad news that caused the selling gone? Well sometimes it doesn't always take good news to cause a rally. The next place to identify is where is the next level to look to short or sell long positions.

In the bottom pane of the chart is two lines that represent 2 pivot points. The red line is the daily pivot. This is calculated by adding the High+Low+Close, and then dividing by 3. So the pivot number for today's action is 1379.75. The blue line is the three day pivot. This is calculated by adding the Highest High in the past 3 days+Lowest low for the past three days+the close, then dividing by three. The three day pivot is 1386.83. With the S&P500 currently at 1387.17, I would not re-short the market or sell current long positions, until the market falls below the three day pivot. The S&P futures are currently up 1.40 in the overnight market, so there is a little cushion there, but that can change fast. Watch the pivot numbers...the floor traders do. More on how to use pivots next time..

Navigating Tough Waters

When the investing world's view starts to change from the glass is half full to the glass is half empty, it can be a volatile time, but one that also holds opportunity. It can be a stressful time, and this stress can cause a lot of people to make some irrational decisions. These irrational decisions are made on the basis of fear and the feeling that everything is different this time. Things are not different this time, its all part of human nature, and human nature keeps repeating itself time after time.

One thing that can be done when the market waters start to get choppy, is to limit the focus to a select group of stocks. This could be a sector or a list of stocks on a "wish list". It is very hard to watch too many things, so limiting the focus is key to avoiding careless mistakes. It is important to have this list before the market gets crazy. You can not wait until the market is down 250 points one day and then start deciding what you want to buy. It is important to do your homework.

When you feel the market has become oversold and it is time to buy, one way to start to test the waters is with exchange traded funds. There are ETF's that represent almost every index and major sub-sector in those indexes. As you start to test the waters in buying your decided upon ETF, you can also analyze the stocks in the ETF to see which ones are leading and which are load stones. It is best to buy leaders and not waste time with laggards. Buy the best stocks or ETF's when they are on sale, don't buy laggards or second bests just because you think they are safer. Go first class.

OIH is the Oil Service Holders group. It is made up of 15 companies and trades as a tracking stock under the symbol OIH. One method I have used is when the S&P 500 is weak, but I think is becoming oversold, and oil stocks have become oversold just because they are part of the index and not because of fundamental business reasons, I will look to buy call options. The call options I will look at will be a 30-60 days out, and I do look at strike prices one-two levels above where the market is trading. In buying options, you are limiting your risk to the money you have paid for the option, and you have some time on your side, usually 30-60 days.

Once the market has stabilized, and everyone realizes the world is not coming to an end, the call options should be in position to make money. This is the time to decide what stocks in the OIH you want to own. You can decide to own the index, and just stay with your position, or you can decide which 2 or 3 stocks are leading the index. As you buy these 2 or 3 stocks, you reduce your exposure by taking your profit in your call options.



One way to tell which stocks are strong within an index is by using spread charts. In this chart we have OIH at the top with NOV(National Oilwell) in the middle pane, and the spread between the two at the bottom. Since this spread(NOV/OIH) is positive, it shows that NOV has been stronger than the over all performance of the OIH. It is possible to have a chart with the spreads of all 15 stocks in the OIH. This makes it easy to view which are leading and which are lagging.

This can be done with the NDX(nasdaq 100), the S&P 500, or any other index. It is helpful to compare sub-sectors to the index too see if they are leading or lagging. If leading, it is then helpful to dig inside that leading group and find the true gems.



This is a weekly chart of the NDX(nasdaq 100)and Apple Computer; and the spread. This chart shows Apple has been a leader in the index.

If anyone would like a custom spread chart, leave a comment and I will see what I can do.

Buy Dips or Sell Rallies?

The above chart is the S&P 500, with volume, advance/decline of the NYSE, and the advance/decline of the Russell 1000. The sell off a couple weeks back might seem like old news to some, but was it just a one time thing or just a sign of things to come?

This chart shows that the weak rally since that high volume down day has not had much power to it. As the index slowly tries to recover, volume is becoming less and less. This means that the participation in this rally is not enough to sustain too much more on the upside. We need more consolidation or a bigger drop to get more participation on the buy side. The NYSE ADV/DEC has hit the upper end of its range, and there should have been a greater move upward in prices. The down sloping volume shows that confidence isn't there yet.

If we take out the low of 1373.97, look for volume to increase as selling picks up. The next target on the downside is around 1317, which is a significant down move. This should not happen in one day, but if it happens, should take a couple weeks.

Watch the price of oil, it has been going down in recent days, but if it gets back above $60, it could bring back a focus to selling stocks and asking questions later. Even with the down move 2 weeks ago, there is still apathy and not enough fear in the market. Gasoline over $3 is a hidden tax on the economy, so look for that to be talked about in the news. This usually effects retail stocks. How far does the exposure go with the problems with some of the sub-prime lenders? There is also a battle of opinion going on in the bond market on if the fed is going to cut rates or continue to raise them later in the year to cut inflation.

More on that next time....

Canary In A Coal Mine?

Two days ago our markets took a hit after China's market had a 9% decline and some comments by Alan Greenspan hinted at the recession word. All of the "experts" have been on TV today saying its a buying opportunity for all kinds of various reasons. It might be a buying opportunity, but it might be the beginning of something no one wants a part of.

Two key groups to watch to get a gauge on where the market is going is the Broker Dealer Index and the Philadelphia Semiconductor Index. It is very hard for the market to go far on the upside without the brokerage stocks participating. In this example, the chart shows both the S&P 500 and the Broker Dealer Index. The bottom section of the chart shows the spread (XBD/SPX) between the Broker Dealer Index and the S&P500. The brokers tend to outperform the market at all times. When there is a rally, they are stronger, and when there is a sell off, they don't get hit has hard on a percentage basis. On the right side of the chart, the S&P500 is making recent highs, and the Broker Dealer Index has stalled. This shows that either the brokers were ahead of the market and taking a rest, or that this new rally in the over all market is a little suspect. This does not mean that we necessarily have a huge down move, but it could mean that things are going to consolidate, which could get people thinking more about risk. Is the glass half empty or worse?