Tuesday, September 7, 2010

Some Further Notes on Pocket Pivots

Some further notes and thoughts to consider about the "Pocket Pivots"....
  • The authors say that these work best with thinner stocks (under 750,000 shares or less than $30 million dollar volume) but also say these will fail and fall much quicker.   
  • However, they later discuss use the PP technique to find entries in bigger, leading stocks like BIDU, AAPL, etc. so perhaps a volume requirement is up to the individual trader.
  • Must focus on fundamentally strong stocks (not a revelation).
  • Avoid wide and loose bases - try to find bases that are forming with tight patterns.
  • Compare stock to overall market and look for stocks outperforming market
  • Prior to a PP buy, you really need to see tighter prices and some consolidation
  • Stocks should be above 50 day MA (pretty easy to add this in Telechart as PCF)
  • Volume should be preferably drying up before the PP occurs.
  • They say if volume is choppy overall, you can increase the threshold to 11-15 days instead of 10.
  • Stocks that regain their 50 day MA on the PP breakout work well.
Things to avoid when looking for Pocket Pivots.....
  • If the stock dips and then immediately bounces back (forming a "V" pattern), it will be more likely to fail as a PP.
  • Don't buy if they are too extended from the 10 or 50 day moving averages (no specific threshold but 2% or more above those MAs is probably a starting points)
  • If the pattern is wedging upward on lower volume, stay away and ignore potential PP's
  • Never buy a PP in an overall downtrend - always wait for the upswing.
Once again, for more information along with specific examples, check out the book "How to Trade Like an O'Neil Disciple" written by Gil Morales and Chris Kacher.

9 comments:

Shawn said...

Hi Mac,
Thanks for all your good work here.
Via the Gilmo Report, I have studied the pocket pivots for several months and have had a few exchanges with Dr K. It’s an early buy point on a *well-forming* base (usually a few to several days before a CANSLIM B/O).
Here is a summary of my notes, the volume signature is precise and can be easily programmed, but the price action applies to many forms of CANSLIM B/O’s, but IMHO is less precise or programmable. Various Gilmo Reports apply PP’s to breaking through or bouncing off (or near) the 10, 20, 50 or 200 dma; and declining tops (the more confluences, the better) - Dr K has confirmed to me that he scans for price action in addition to the volume signature (not sure how). The technique is also used to buy pull backs in advancing stocks, e.g. it would be used for additional buy points on VMW, FFIV, CRM, etc.
I wanted to clarify things b/c PP’s work much better than traditional CANSLIM B/O's which really haven't worked well since about 2004 (as Dr K says in the book).
All my best,
Shawn

Mac said...

Thanks Shawn - good stuff. I will keep it in mind as I hopefully fine tune this strategy.

Marina said...

Thanks a lot for sharing this. Did you write more about Pocket Pivots before this article? I want to learn more about PP.

Marina

dve845 said...

Marina,

I implemented them on charts.monest.net
Soon they will be available in the stockscreener too.

Best
Dirk

tomham said...

Great thoughts on the Pocket Pivot" signal off of the book "Trade Like an O'Neil Disciple". I have a slightly different read on the indicator tho.
What I got out of the book was the higher volume than the highest down day volume over the past 10 days (we agree on that), but the recent low should have touched the 10 SMA or 50 SMA line. I also added (my own) criteria of the Pocket Pivot bar Close must be in the upper 1/3 of the daily range.
Thus, I have modified your formula as follows:
(C > C1 AND V > ABS(C1 < C2) * V1 AND V > ABS(C2 < C3) * V2 AND V > ABS(C3 < C4) * V3 AND V > ABS(C4 < C5) * V4 AND V > ABS(C5 < C6) * V5 AND V > ABS(C6 < C7) * V6 AND V > ABS(C7 < C8) * V7 AND V > ABS(C8 < C8) * V8 AND V > ABS(C9 < C10) * V9 AND V > ABS(C10 < C11) * V10) And
((L1 ((H-L)*.66)+L

Please let me know what you think, just trying to help out here. Cheers & Good Trading to All.
Tom
P.S. sure would be nice to get a StockFinder RealCode on this once we settle on a formula; hope Patient Fisherman is listening. :)

Mac said...

Hi, Tom. I was also thinking about some criteria for the daily bar because there is no point in buying a PP that finished weak - kind of defeats the purpose. I will try your second scan and see if it works. Thanks.

Mac said...

And I think what you would want Tom is H-C<=(H-L)*.33

tomham said...

Hi mac -
Actually, the last function of the TC formula set should be:
C > ((H-L)*.66)+L

Looks like it got left behind. :)

One additional thought to add (perhaps after the Pocket Pivot is settled) is the concept of what the background looks like right before the PP. One concept that I've used is the 34,2 Stochastic, to indicate a pull back / correction (this ID's a typical "cup and handle" formation, tho not a "high base").
If interested I can post that TC formula as well + some sources for "agressive" CANSLIM type candidates to monitor / include in a WatchList.
Cheers. ..... Tom ......
P.S. Nice blog, Thanks for doing this!

tomham said...

Please "check that" in my last comment. After reviewing the my first post, it looks like the entire right 1/2 of the formula set was left off. I'm not sure why.
The TC formula as shown in my post is NOT Correct. I can try to re-post it, or let me know how to get around a very long string of charaters without truncating them.
Sorry 'bout that.