I've been working with pivots for a few years now. I used to have all the moving averages, Bollinger bands, RSIs on charts and then I started noticing how often the daily and weekly pivots were on the turns and moves that mattered. Then I wondered - could there be a monthly pivot? I checked it out and was soon convinced. While I still like RSI, and Bollinger bands also can be helpful in spotting divergence, Pivots have been my number one choice for years.
Again in response to recent feedback, here are a few key points:
1. The Pivot is a basic bull bear line; bullish above, bearish below.
2. Support (S) levels indicate a possible low area; Resistance (R) levels indicate a possible high area.
3. The bigger (ie longer) the level, the more important. This gives a clear hierarchy: year, half-year, quarter, month, week, day. I call the year and half year long term because these impact the market 6 months to a year; quarter and month are medium term; week and day are short term.
These Pivotal key points give us a number of corresponding conclusions and strategies:
1. Best uptrend is a vehicle above all pivots, especially the long and medium term levels. While we can monitor weekly levels for short term moves, an asset could easily break a daily or weekly pivot several times over the course of weeks or months and remain in a screaming uptrend. Correspondingly, the worst downtrend is below all pivots. Sometimes there are no strong trends, and you can look for above 3 or below 3 giving more weight to the long term levels.
Examples: Following this simple idea meant shorting oil without thinking about it too much in July 2015 (before that too, in 2014, but just selecting a few recent examples here), then again in November; buying USA especially QQQ early October, adding to full position mid October; shorting EEM, FXI, EWZ, RSX, PIN at various points last November; scramming from USA longs 1/4-7, adding shorts; long TLT 1/6 and adding 1/22+, long GLD in January too. There are others, but these have been the big moves.
This doesn't mean you buy willy nilly or after a huge run. You are looking for times when the market changes pivot status and you can enter near the pivot ie change of trend and define your risk. Like on 1/6/2016 when SPY broke its YP targeting YS1 186 area, possible short or at least scram for longs. On the very same day TLT jumped above 3 pivots that were all clustered and an excellent buy signal.
Changes of pivot status, especially when multiple indexes are moving the same way, is important in the market. Think USA indexes early January, on 12/29 SPY was above 3 pivots and was appearing to open 2016 above all levels; on 12/30 perhaps the next monthly was still a toss up; on 12/31 the 2HP broke on the last trading day, more important looked like the open would definitely be under the new JanP; then actually opened below the JanP and the Q1P in other words above 2 and below 2, long term testing but medium term down; 2 days later broke the YP and HP so "below all pivots" and then the breakdown followed, The same thing was happening in USA indexes across the board, and of course the weaker global indexes had already opened below all pivots.
After a correction in a larger uptrend, often the best choice for long is any vehicle that has held more pivot support compared to others. This kept you playing the long side in IBB, for example, 2012-2015, one of the best trends in the market. Conversely on the downside, EWZ was below all pivots from at many points in 2015. So despite bouncing from March to April along with oil, you didn't have to wonder too long where to put on some shorts - just scan for "below all pivots."
2. Turns happen on R or S levels. If there aren't multiple indexes on pivot resistance or support, it probably isn't an important turn in the market. This saves a lot of mental energy, because can stop wondering if this is the day to buy or sell. No pivot no new position or position adjustment! So, R levels are potential profit areas on longs and S levels are potential profit areas on shorts. It is very tempting to short Rs and buy Ss, and once in a while this works, but really this is counter-trend and we all know the trend is your friend. Here is a detailed post on why it is generally better to buy above pivots and sell below, despite the temptation to short Rs and buy Ss. Note "shorting" and "buying" is much different than "taking profits" and "covering."
Recent examples: taking partial profits on TLT longs near YR1, especially when it tagged the 1HR2 and dropped back under both levels on high volume.
There are times an R level overthrows then falls back under (like Shanghai Comp YR3 in 2015), or an S level breaks and recovers (like INDU YS1 just last week) so a 1 day move is not forever. Overshoot and rejection is still a rejection; break and recovery is still a recovery. There are also incidences when a previously exceeded R level can turn into support, or a previously broken S level can turn into resistance. Think an index that had a nice rally above an YR1 to and YR2, then corrected and held the YR1 as support. Ditto in reverse for down.
3. The biggest moves are on the biggest levels. Sometimes you have to wait months for a yearly pivot move but this year almost everything delivered (meaning YP to YR1, or YP to YS1) in 6 weeks. Maybe we are about to have a huge turn in markets, or we will see YR2s.
4. Even if you are trying to buy a severe downtrend, you will avoid losing too much money by waiting for when the market is at least above a quarterly pivot. Conversely, if you are short a market in severe downtrend, you could hold a portion of positions until you see it recover at least a monthly pivot and in many cases a quarterly.
Same logic in reverse the other way; if you are trying to short a screaming uptrend, you won't lose too much if you wait for when the index breaks a quarterly pivot. You may have a break and recovery a few times, but still - example IBB, shorting only below a QP, kept you out of trouble and eventually gain a huge gain. Or if you are long IBB, then holding a portion until a quarterly pivot broke kept you in the trade for longer (instead of taking all profits on first tag of a big R level).
5. When do pivots NOT work? When they chop. It is rare but it can happen. While it is common to see a few changes of status on major turns in the market - more on this in another post someday - once in a great while pivots chop excessively. For example, in year 2000 the SPX YP and HPs changed status 16 times on a weekly basis, where the average is just 4. Some years don't change at all. There was a similar sideways congestion chop fest in USDJPY for months from January 2014 to August on the 1HP until another decent move got going. So I think best to have some limit on reversals per the period you are trading, and if you have struck out too often just come back for the next quarter or half. OR, if one level is chopping, then get a combination of levels for your next entry.