Trends

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.

san ramon fee only napfa certified financial planner cfp advisor - AMD 3-19-19.png

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

From the Ashes?

I haven’t written about the Millennial savior, bitcoin, in well, it seems like forever. Not because I don’t like it but rather its was in a horrendous long-term downtrend, losing more than 90% of its value in 15 short months. What’s there to talk about? But, of late its price has taken a much more constructive look as it has been trading sideways (instead of falling further) and looks as it may have found a short-term bottom while trying to clear out the remaining sellers. This, of course, is an ideal setup for a bullish trading opportunity. While it may turn out to be a long-term investment (not my belief), until it proves itself it must be viewed only as a trade.

san ramon fee only napfa investment advisor certified financial planner gbtc 3-6-19.png

As you can see, price has been contained within the rectangular box, is now above a rising 50-day moving average while volume (bottom pane) has been shifting from large red candles (selling) to green (buyers). In spite of its potential short-term holding period, the first upside target is ~25% above the upper boundary of the rectangle. Two ways to trade this setup using this pink sheet bitcoin proxy, GBTC, is to buy the breakout of the rectangle, with a stop placed 3% below the breakout level after purchase. The second, which has a much higher upside target (>50%) but has less chance of getting filled, is to place a limit order down at the bottom of the rectangle. If the order gets filled, your stop would be placed 3% below the bottom of the rectangle.  In either case, the risk is well contained (likely less than 5% depending upon the price of GBTC gets filled at) and provides either a 25% or 50% potential pattern target reward. A minimum 5:1 or best 10:1 reward to risk is a setup any investor/trader would love to have as they don’t come along that often.

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.

san ramon napfa certified financial planning cfp advisor 3-4-19.gif

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

san ramon napfa certified financial planning cfp advisor 3-4-19 $TRAN.png

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.

Your Turn

Those long-term followers know I use ratio charts as a part of my process, mostly to help determine where best to allocate investment capital. As with investment prices, trends persist when it comes to outperformance (ratios). The chart below I call “Risk On” is a ratio of the US SP500 stock index performance to US 30-year treasury bonds and its message helps define current risk levels. If the ratio is rising, risk is low and you have achieved (and will likely continue due to trend persistence) the best return by investing in US stocks only. If the ratio is falling, risk is elevated and bonds are out-performing.

bay area cfp investment advisor - risk on - 2-20-19.png

With a quick glance, what should be immediately noticeable is the ratio broke below its rising uptrend support line in November of last year. This occurred at the same time when RSI momentum (upper pane) diverged (both short term and longer term) with the ratio warning of an increase in risk and possible trend change. From that point the ratio was crushed with the strong year-end selloff in stocks.

With stocks rebounding strongly from their massively oversold condition the ratio has, as you would expect, mirrored its move higher. Uninspiringly, the ratio closed out yesterday still below its falling 200-day moving average and has yet to make its first higher low. Looking left we see that the ratio is about the same place it was 12 months ago telling us that stocks and bonds have had a comparative return. Now what?

Closing out this post right here intentionally not providing a summarization or point to the post, I am wondering how you would interpret the charts message? Pile in to stocks gunz a blazin’? Stay on the sidelines in the safety of bonds and let the dust settle? or something in between?  I’d love to hear your thoughts and opinions.