Day Trader column for July 3 – 2012

Our market moved up strongly on Friday, but it was not enough to form a weekly pivot point. Staying with the weekly chart, all of last week’s trading was contained within the range of the previous five weeks. A weekly close above or below this narrow trading range should tell us the direction of the next move.

I have commented before how, contrary to popular belief the US market follows us, rather than our market following the US market. Friday was a clear example when our market moved up immediately the news of some sort of consensus in Europe was announced around lunch time. This news was not reflected in the US market until it opened late Friday night our time.

Market moving announcements made when most markets are closed are reflected in our market before US and European markets, as we are one of the first markets to open because of our time zone.

Before I continue on from last week’s beginning explanation of my “Ten Steps to Follow the Money” I will explain how to identify Pivot Points.

By definition a change of trend cannot take place without a pivot point forming. Daily pivot points are more common than weekly pivot points. (For example, during the past six weeks there have been four daily pivot points to the upside and three to the downside and still no weekly pivot point to the upside.)

A daily pivot point precedes a change of the short term trend and if the short term trend continues, a weekly pivot point will form and this is likely to precede a longer term trend change.

To identify a daily pivot point to the upside, look for the day the lowest low is formed. This is the reference day. Check each subsequent day and ask two questions. First, did it make a lower low. If not, then did it CLOSE above the highest level of the day the lowest low was formed. If so we have a pivot point to the upside. If not, then ask the same questions of each subsequent day until a close if formed above the high of the day the lowest low was formed. If one of the subsequent days forms a new low then that becomes the reference day.

For a weekly pivot point, just substitute weekly for daily in the above paragraph.

A pivot point to the downside is the reverse of the above. Instead of the lowest low, the day (week) the highest high is formed becomes the reference day (week). The questions for each subsequent day (week) then become – did it make a new high. If not, did it CLOSE below the lowest level of the references day (week), if so we have a pivot point to the downside. If it did not close blow the low of the reference day (week) watch each subsequent day for a close below the low of the reference day. If a subsequent day makes a higher high it then becomes the reference day.

Only after a WEEKLY pivot point forms it is time to look at the short term and longer term trend to see if the trend has been broken. If the trend has been broken the next thing to look for is where support/resistance levels are.

Resistance/support levels are used to determine if a move will

allow a sufficient profit to satisfy our criteria.

Next week I will expand on support/resistance.

Find past columns at: www.thedaytrader.com.au

Portfolio Position

Cash $290,667

Shares Nil

Total $290,667

Starting capital $50,000 in July 2006