Lessons From The Multi-Pivots For June 20, 2011

[Billy]

Forum Clusters 110620.xlsx

The roadmap outlook for Monday is very bullish for SPY and GDX, slightly bullish for IWM and extremely bearish for QQQ.

The QQQ is the real source of technical concern for this market, plunging below the 200-day moving average and with almost no support left below last week’s lows. It is now in its first week of weekly “early distribution” sub-stage which is the very last neutral to slightly bullish point in the intermediate term stages cycle.
The two support clusters are totaling a bleak strength of 7 versus strength of 26 for the two resistance clusters! This is an extremely bearish imbalance rarely seen for any index. A down trend day on Monday could go at full speed to WS2 (52.44). However, the bullish outlook for SPY and IWM is not warning of an overall market washout. Most important too, as mentioned in other posts, MS3 (53.90) has a 95% probability of marking the low for the month of June and many algorithms must be programmed to stop selling at the current level. If you actually adjust Friday’s ex-dividend close with the 12.1 cents dividend, the adjusted close was actually 53.91, just above MS3! The adjusted first support cluster would therefore become 7 instead of 4. This MS3 of QQQ will be the most important level to watch on Monday for gauging the chances of a successful bullish reversal in SPY and IWM. QQQ should really not try to run away decisively to the downside from here and any attempt to do so must quickly be bought heavily by large players to avoid cascading panic selling.



The outlook for SPY is much more reassuring and the clusters’ support/resistance ratios are very bullish with 19:8 for the first clusters and a total of 22:11 for the two clusters taken together. Here also the MS3 (125.99) becomes important and is in perfect confluence with the 200-day moving average (126.07). I would almost bet the castle that it is where the selling programs will stop and reverse until the end of the month.



IWM is slightly less bullish than SPY but will be mostly helped by its improving Relative Strength vs. SPY. The first support/resistance clusters strength is 14:12. In the hypothesis of a last capitulation selling flush early next week, the robot’s trailing stop at 76.97 is just under the confluent cushion of the 200-day moving average (77.26) and the new WS1 (77.08). If the stop is hit, the robot will exit the long position. Due to the very strong buy probabilities, it will likely look to re-enter a long position on the next day but at a new entry price that could differ greatly depending on Monday’s close. The robot executes its plan first and never tries to anticipate.



Although the new long buy signal for GDX is rather weak in terms of LT/ST probabilities, I like the proposed setup a lot. An entry at a limit of 51.57 would be just above the first support cluster with a good strength of 11 while the initial stop at 48.09 will be below a potential down trending day range and further protected by the second support cluster also strong with strength of 10. The initial one-day move after entry should be easily driven to the upside thanks to the weak first resistance cluster’s strength of 5.
Billy

[slgerritz]

Billy or Pascal,
The GDX robot gave a new signal to buy at $51.57. Is the robot telling us to wait for a drop to the $51.57 before buying? If so, the strong MF into the sector may not give us to opportunity to by at $51.57. If the train leaves the station should we chase the price or wait for robot entry price?
Steve

Attachment 8893

The roadmap outlook for Monday is very bullish for SPY and GDX, slightly bullish for IWM and extremely bearish for QQQ.

The QQQ is the real source of technical concern for this market, plunging below the 200-day moving average and with almost no support left below last week’s lows. It is now in its first week of weekly “early distribution” sub-stage which is the very last neutral to slightly bullish point in the intermediate term stages cycle.
The two support clusters are totaling a bleak strength of 7 versus strength of 26 for the two resistance clusters! This is an extremely bearish imbalance rarely seen for any index. A down trend day on Monday could go at full speed to WS2 (52.44). However, the bullish outlook for SPY and IWM is not warning of an overall market washout. Most important too, as mentioned in other posts, MS3 (53.90) has a 95% probability of marking the low for the month of June and many algorithms must be programmed to stop selling at the current level. If you actually adjust Friday’s ex-dividend close with the 12.1 cents dividend, the adjusted close was actually 53.91, just above MS3! The adjusted first support cluster would therefore become 7 instead of 4. This MS3 of QQQ will be the most important level to watch on Monday for gauging the chances of a successful bullish reversal in SPY and IWM. QQQ should really not try to run away decisively to the downside from here and any attempt to do so must quickly be bought heavily by large players to avoid cascading panic selling.

Attachment 8894

The outlook for SPY is much more reassuring and the clusters’ support/resistance ratios are very bullish with 19:8 for the first clusters and a total of 22:11 for the two clusters taken together. Here also the MS3 (125.99) becomes important and is in perfect confluence with the 200-day moving average (126.07). I would almost bet the castle that it is where the selling programs will stop and reverse until the end of the month.

Attachment 8891

IWM is slightly less bullish than SPY but will be mostly helped by its improving Relative Strength vs. SPY. The first support/resistance clusters strength is 14:12. In the hypothesis of a last capitulation selling flush early next week, the robot’s trailing stop at 76.97 is just under the confluent cushion of the 200-day moving average (77.26) and the new WS1 (77.08). If the stop is hit, the robot will exit the long position. Due to the very strong buy probabilities, it will likely look to re-enter a long position on the next day but at a new entry price that could differ greatly depending on Monday’s close. The robot executes its plan first and never tries to anticipate.

Attachment 8896

Although the new long buy signal for GDX is rather weak in terms of LT/ST probabilities, I like the proposed setup a lot. An entry at a limit of 51.57 would be just above the first support cluster with a good strength of 11 while the initial stop at 48.09 will be below a potential down trending day range and further protected by the second support cluster also strong with strength of 10. The initial one-day move after entry should be easily driven to the upside thanks to the weak first resistance cluster’s strength of 5.
Billy

Attachment 8895

[Billy]

Billy or Pascal,
The GDX robot gave a new signal to buy at $51.57. Is the robot telling us to wait for a drop to the $51.57 before buying? If so, the strong MF into the sector may not give us to opportunity to by at $51.57. If the train leaves the station should we chase the price or wait for robot entry price?
Steve

Steve, if you want to take advantage of all the edges included in the robot design, you need to wait for an entry limit to be hit. A big chunk of the outperformance of the robots is stemming from waiting for the optimal entry points. The initial optimal stop is an important function of the limitentry price. No need to chase the train blindly, tomorrow may offer another optimal entry limit for the risk management system of the robot. If you buy at another point, the robot management becomes useless and it becomes pure discretionary trading.
Billy

[Pascal]

Billy or Pascal,
The GDX robot gave a new signal to buy at $51.57. Is the robot telling us to wait for a drop to the $51.57 before buying? If so, the strong MF into the sector may not give us to opportunity to by at $51.57. If the train leaves the station should we chase the price or wait for robot entry price?
Steve

Really, we cannot advise explicitly on this point.
In the long run, buying at the open for GDX is also working fine as the back-test has shown.
On the other hand, the GDX ATR is 2.82% right now. The buy point is 0.77% below last Friday's close. This means that statistically, the buy point is well within the usual day volatility.


Pascal

[slgerritz]

Pascal,
Where is the GDX ATR of 2.82 derived from? On freecharts.com is says it has a daily ATR 14 of 1.46.
Steve

Really, we cannot advise explicitly on this point.
In the long run, buying at the open for GDX is also working fine as the back-test has shown.
On the other hand, the GDX ATR is 2.82% right now. The buy point is 0.77% below last Friday's close. This means that statistically, the buy point is well within the usual day volatility.


Pascal

[Pascal]

Pascal,
Where is the GDX ATR of 2.82 derived from? On freecharts.com is says it has a daily ATR 14 of 1.46.
Steve

We are using a 20D ATR.

Pascal

[adam ali]

Billy,

Stockcharts.com have recently instituted pivots on their charts. In their blog, they list their standard pivot calculation as the following:

Pivot Point (P) = (High + Low + Close)/3

Support 1 (S1) = (P x 2) - High

Support 2 (S2) = P - (High - Low)

Resistance 1 (R1) = (P x 2) - Low

Resistance 2 (R2) = P + (High - Low)

This appears different than the calculation used on this site. If true, do you happen to know why the difference?

Adam

[Billy]

Billy,

Stockcharts.com have recently instituted pivots on their charts. In their blog, they list their standard pivot calculation as the following:

Pivot Point (P) = (High + Low + Close)/3

Support 1 (S1) = (P x 2) - High

Support 2 (S2) = P - (High - Low)

Resistance 1 (R1) = (P x 2) - Low

Resistance 2 (R2) = P + (High - Low)

This appears different than the calculation used on this site. If true, do you happen to know why the difference?

Adam

Adam,
I have no idea what they're trying to do. First, using only 2 levels of support and resistance is useless. Second, their computation, even with their formulas are wrong.
They probably are trying to align on freestockcharts because I saw that they added VWAP too.
I don't recommend relying on their pivots as they are displayed now.
Many sophisticated variations of the formulas have been introduced over the years and most were only marketing gimmicks. What I'm sure is that the classic formulas are working perfectly for setup planning purposes so I don't see any use deviating from them. Stockcharts is an excellent technical analysis resource, but not a very good trading resource.
Billy

[adam ali]

Thanks for the heads up on this. One final question and it may be in one of the (few) books/articles on pivots out there: how did this methodology come to be in terms of its statistical/theoretical foundation? I'm wondering how someone one day decided to take the high, low and close, divide by three, etc. and said "That works!"

[Billy]

Thanks for the heads up on this. One final question and it may be in one of the (few) books/articles on pivots out there: how did this methodology come to be in terms of its statistical/theoretical foundation? I'm wondering how someone one day decided to take the high, low and close, divide by three, etc. and said "That works!"

If anyone can find a reliable historical source for this I would be most grateful!
My hypothesis is that many decades ago, before the age of computers and light-speed trading, when most floor traders were lowly-educated people who never graduated in anything, they needed easy-to-compute formulas for defining intermediate levels for sizing in and out of their positions.
One day a statistician made a study and probably discovered the bell curve standard deviation structure of the pivot formulas. It started to work for one, then a few, then several, then many floor traders as the word spread around, further reinforcing the self-prophecy nature of the pivots.
I remember my first days as a market maker trainee, expecting complicated technical analysis and charting trading lessons. I never saw any chart or any technical analysis. Only spreadsheets with the house position's average price compared to the various floor levels. And it worked!
Billy