Tuesday, July 21, 2009

The Importance of Pivot Points

Here is a 5 minute chart of the ES, I got stopped out at 944.50 even though I said from the beginning today this market wants to hit 965 at least. However I jumped the gun a bit on the long call as the reaction of the sellers had not yet been complete.

If you look at this whole rally up from 865 last week the biggest reaction to the downside was about 10 points or so. Well when I got in we had gotten a 10 point reaction from the mornings high, so I felt that odds where in my favor to pinpoint a precise target. Well I was off a couple of points, and this bothered me so I looked more into the data and found something simple yet very effective. Pivot Points:

Pivot points are calculated by taking the high + low + the close of the day and dividing by 3. A close above is bullish, below is bearish. With futures it is a little more complictaed because they trade 24 hours round the clock it is hard to get a close. I use the midnight close as my number but another way to come up with a round number is to find the midpoint of the high and low of the previous day and that can be used as a pivot point. I have all this data in an excel spreadsheet so I am always prepared.

So take a look at the chart again, my pivot point from yesterday calculates approximately 939 (horizontal line) the low of the day was 939.50 excellent entry opportunity in hindsight. Another valuable lesson learned and another tool to add in our trader's toolbelt.

I expect if this market breaks the highs of the head in our pattern to see some serious short covering which in turn will shoot this market up rather quickly possibly by weeks end, until then I will daytrade and take what the market gives, I do have working order to short ES @ 965 though, and I will elaborate why in a later post.