Investments

Pocket Pivots

Pocket Pivots

The pocket pivot concept is, in essence, a favorable early-entry buy point in a stock. Buying pocket pivots are advantageous because the signal attempts to get investors into stock early and often times before it has broken out of consolidation. Stocks alternate between trending and consolidation and an area of consolidation provides an investor an excellent time to enter a stock early in preparation for the next move higher. It also allows investors to add to existing positions in a winning stock, if they so choose, as trending stocks often have multiple pocket pivot points as they move higher.

The basic premise of the Pocket Pivot:

  • Institutional buying creates new-high base breakouts, but we also know that institutional buying occurs within consolidations and during uptrends. 

  • This buying within consolidations and uptrends in most cases leaves price/volume "footprints".  These footprints are big volume spikes, typically 50% or higher than the normal average daily volume.

  • The pocket pivot describes that "footprint," and provides a clear, buyable "pivot point," or "pocket pivot buy point."

  • Pocket pivots also provide a tool for buying leading stocks as they progress higher within uptrends, extended from a prior base or price consolidation.

Prices of stocks cannot trend (higher or lower) unless there is institutional activity. The average investor does not have a pile of capital large enough to move the markets, only institutions do. As such, it can be profitable mirroring their movement, which is visible via big volume. No different than tracking elephants. Just look for the big footprints and big piles of ….

Pocket pivots can occur at any time but not all are a buy signal. To increase the probabilities of a profitable outcome, I have found that buying only during (or a breakout of) consolidations provide the highest winning probability.

A good example of pocket pivots can be seen in the AMD chart below. Those that I have annotated were the only ones that met my criteria. Notice that today, AMD registered a pocket pivot buy signal yesterday (note the big volume and break out of the area of consolidation), moving higher by more than 11% on the day.  152M shares traded vs the 10day average of 49M which is a confirmation of accumulation by institutional investors. The good news for is that our core+ accounts purchased AMD earlier in the year during the first pivot breakout. Its been a frustrating few months during this sideways consolidation but our patience has been rewarded. Upside targets are above at T1, T2.

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As always when it comes to investing in anything, YMMV.

Curious Minds Want to Know

There should be no question as to why people need to invest. The cost of everything you need continues to rise and your savings need to keep pace. In the chart of US Price and wage changes below, I wonder if the #2 biggest riser, college tuition, includes the cost of paying bribes, proctor assistance, photoshop training and crew lessons? If not, can you imagine how much further ahead of hospital services it will be in the next update?

Curious minds want to know.

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20 Rules for Markets and Investing

Whether working with longer-term investors or traders honing their skills, one of the most important things is to insure they have a set of rules. The good news is the rules below are appropriate regardless of your timeframe, strategy or approach. I have to give thanks to Pension Partners director of research, Charlie Bilello, for putting the original list together. I keep it taped to my monitor as it is invaluable in helping to keep the focus. Please note they are in no specific order and level of importance will vary depending upon the individual reader/investor.

1)     1)     Ego is your biggest enemy. Humility is your best friend. (Ego is concerned with who is right while humility is concerned with what is right.)

2)     There is no reward without risk. You can’t have one without the other as such if it seems too good to be true, it is.

3)     The longer your holding period, the higher the odds of your success

4)     Every time is different. You haven’t seen this movie before. No one has.

5)     Price targets are pointless. Forecasts are foolish.

6)     Plans > Prophecies.     Evidence > Opinions.

7)     Cycles and Trends exist.  That does not mean they are easy to predict or navigate but they provide an edge for those that know how to use them.

8)     Focus = fastest way to build wealth (when you have it) and the fastest way to destroy it (when you don’t)

9)     The only certainty is uncertainty. Expect the unexpected. Suspend the disbelief

10)  Time is infinitely more valuable than money. No amount of money can buy the past.

11)  Saving is more important than investing. No savings = no investing.

12)  Simplicity beats complexity on average.

13)  Lower fee beats higher fee on average.

14)  Doing nothing (low frequency) beats doing something (high frequency) on average.

15)  Don’t be afraid to say “I don’t know”. Stay within your circle of competence.

16)  Volatility and sentiment are mean-reverting at extremes.

17)  No one rings a bell at the top or the bottom but many ring it in hindsight.

18)  The strategy you can stick with is the best strategy.

19)  Diversification & asset allocation protect us from our inability to predict the future but also from not having a plan.

20)  Controlling your emotions (fear and greed) is the hardest and most important thing.

Watching the Transports

A bearish engulfing candlestick pattern is a reversal pattern, occurring at the top of an uptrend. The pattern consists of two candlesticks: 1) a smaller bullish candle (Day 1) followed by a 2) larger bearish candle (Day 2). The bullish candle real body of Day 1 is contained within the real body of the bearish candle of Day 2. On day 2, the market gaps up (typically interpreted as a bullish sign) however, the bulls run out of gas and do not push price very far before the bears take over reversing price down, not only filling in the gap from the morning’s open but also below the previous day’s open. A completed pattern warns of a high probability (at least for the short term) the uptrend is over. The larger the candle body and volume on day 2, the higher the probability of a reversal.

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Taking a look at the weekly chart of the Dow Jones Transportation stocks you can see last week closed with that same bearish engulfing candle. Unfortunately for the bears, while last week’s candle did engulf the prior week, it was not overly large. In addition, the weekly selling volume was just slightly above average, nothing out of the norm. If you look to the immediate left at the most recent prior peak in November of last year, it too formed a bearish engulfing pattern where the gulfing candle was not only huge but was confirmed with excessive selling volume. Notice what happened immediately following. This is why you need to take notice when these patterns appear

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I have been saying for a couple of weeks the market looks tired but was not yet telling us we had reached the end of this reversion to the mean bounce from last Christmas eve. With last week’s close though, the transports have thrown out the yellow caution flag warning long-term investors to likely expect further selling pressure and short-term traders to cash in their chips or at least tighten stops.