Wednesday, February 24, 2010

Using the Day's Pivot Level to Identify Trending Days in the Stock Market

One of the most important price levels for my own trading is the pivot level for the day. The way I calculate pivot level is as an approximation of the average trading price from the prior day. I post the day's pivot level each morning before the open via Twitter (follow the tweets here).

Over time, watching markets long enough and tracking indicators of intraday sentiment, intermarket themes, and patterns of sector strength/weakness, you can gain a sense for when we're likely to trade back to the day's pivot level and when we won't.

There's a historical tendency for strong markets to open above the pivot and never look back during the trading day.

There's a historical tendency for weak markets to open below the pivot and never look back during the day.

Going back to 2000 (N=2550 trading days), when we've opened above the pivot and never returned to the pivot (N=427), we've averaged an open to close gain of .64% (346 days up, 81 down). Not too bad.

Over that same period, when we've opened below the pivot and never returned to the pivot (N=335), we've averaged an open to close loss of -.80% (58 up, 277 down). Also impressive.

The whole trick is identifying early strength after we open above the pivot and identifying early weakness after we've opened below, so that you can ride that directional tendency. And that's a function of sustained market observation and pattern recognition.

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5 comments:

traderd63 said...

How do I use the pivot figures you have on your blog for the ES?

Brett Steenbarger, Ph.D. said...

Hi Traderd63,

A rough estimate is to multiply the SPY figures by the ES factor (ESf) that I list each day. Recently that factor has been 9.96.

Brett

traderd63 said...

Can I use something similar for the YM, Dow?

Daniel said...

Ever any insight to be gained from if and when that adj factor goes to 9.98 or 9.94?

NQ Trader Jay said...

Good call on daily pivot. looks like we may even end there.