Filters

Pivots work well a lot of the time, but even with a good method there can be some false signals. For example, yesterday SPY looked to be lifting from the FebP. As this was the first change of pivot status since 1/6, this appeared to be at least somewhat bullish - keeping in mind that SPY was still well below the more important longer term levels of the yearly and half-year pivot. That said, with nearly all stock indexes and ETFs rallying from yearly levels, one could have easily thought the bounce would go further. As it turns out, the market will open lower today and while SPY will still be within striking distance of the pivot, SPX and ES are clearly below. 

If you looked at the SPY bar and reduced hedges or shorts based on first daily close above the pivot, then you'd have to be thinking about putting them back on today depending on the close. The main point of this post is to consider ways we can reduce false signals. This takes a bit of work, but those who like to understand the market and have fewer wrong moves will benefit. But if you don't have a lot of time, still I suggest #1 and #2. 

1. All variants of asset
Check all variants of the asset you are trading. This involves just a bit more work, but I think the result is higher confidence setups when they are all clear. For example, I refer a lot to SPY here but the cash index SPX is really the base for the ETF; and there is quite a lot of trading on the ES futures contract. As most people know, these are all related and exactly what I mean by "all variants of the asset." So there is a similar point on QQQ / NDX / NQ; DIA / INDU / YM; the Russell and TF futures; and the list goes on in bonds and commodities. For example, showing the SPY / ES / SPX all below. 

SPY looks more like lifting from pivot support. However, both the ES and SPX look like small blue bars (weak buying) which changes the picture. Weak buying from support is more vulnerable to a break just like weak selling above support increases the chance of a bounce. So if 2/3 of the variants are not clear, then maybe wait a day or adjust positioning in a similar fraction.

2. Volume
Check the volume bars on SPY and ES above. You can see that despite the first of the month which is often active, volume on both was low. In fact, both appear to the lowest volume up day of the year. Now judgement of volume can be more complex at times, meaning sometimes a volume spike is a turn and sometimes it takes divergence (ie higher highs in price with lower volume, or lower lows) but low volume buying is just not what you want to see on a bounce if you are playing for higher.

3. RSI
There are a lot of technical tools out there, but I had to add one it would probably be RSI. I know lots of people use MAs, and they can be somewhat useful, but once you start looking at different timeframes there are MA lines everywhere. Check this hourly chart of SPY and RSI on Friday and Monday was the highest it has been since 12/28. Not a great place to buy in a overall down trending market. 

4. VIX and other safe havens
I like pivots on VIX quite a lot. On VIX, it indeed dropped from the FebP which does look bullish, but bang on to the more important Q1P. So a reason to perhaps wait one more day. XIV really nailed it this time, with resistance bang on the FebP. In other words, using VIX you had a sign of caution (ie don't buy stocks with VIX on larger support) and using XIV you would have correctly NOT changed positioning (either by adding longs playing for a bounce or reducing shorts / hedges). Additionally, sometimes TLT or other bond vehicles can help confirm stock positioning.


5. Watch correlated assets
Obviously there has been a lot of selling pressure due to oil and China this year. Yesterday, oil was down about 7% and below all pivots while stocks were fractionally up and most barely above FebPs. In fact, the broader market only stabilized when CLH6 held its YS1 on 1/20-21. China in the form of Shanghai Class A index (what is available on tradingview) and FXI both below all pivots. In other words, factors that have produced selling pressure were still clearly vulnerable as of Monday.