Combining Cycles and Pivot Points to Predict Market Moves

By Person, John L. | Futures (Cedar Falls, IA), December 2002 | Go to article overview

Combining Cycles and Pivot Points to Predict Market Moves


Person, John L., Futures (Cedar Falls, IA)


TRADING TECHNIQUES

Stir together cycles for timing and pivot point analysis for pricing. Throw in a little Fibonacci, and you come up with potential target lows for stock indexes. Is this a year when bulls should be preparing for a 'happy holidays' present?

The two critical events for traders are where and when. From Wall Street to LaSalle Street, the country is full of ex-traders who were right on calling a market's price move but dead wrong on timing.

Looking at the most popular market in history, the U.S. stock market, two reliable tools have been uncanny in helping to pinpoint both time and price with a small degree of error in determining important market bottoms this year. The first tool is the study of cyclical analysis. The other tool is pivot point analysis, using different time frames to calculate the corresponding support numbers as cyclical lows have occurred.

RIDING THE CYCLES

Analyzing cycles, or the recurrence of events, to predict tops and bottoms of market prices is a fascinating study. According to some traders, projecting future market behavior derived from past performance is unpredictable and not a consistently accurate trading tool. However, the coincident factor of recent equity market price behavior indicates it has been an incredible tool in determining the major short-term bottoms in the Dow Jones Industrial Average (DJIA) and S&P 500 index futures contracts so far this year.

To understand the methodology behind cycles better, let's first examine the four important principles of cycle analysis:

1. Summation, which is the addition or measurement of two or more cycle lengths.

2. Harmonically interacting cycles, where prices will react with a cycle within a cycle.

3. Synchronicity, which relates to the market price having a strong tendency to repeat at the same time.

4. Proportionality, which deals with the time interval of corresponding price behavior (tops or bottoms) and the price movement or market reaction from that point.

"Bottoming out" (below) shows a five-month cycle study for recurring bottoms in the S&P 500 and DJIA futures contracts. As you can see, the price reaction varies from cycle bottom to cycle bottom. Nevertheless, the recurring lows are pronounced and distinguished.

The next lows in this cycle are due in December when the synchronicity and potential harmonic timing may occur with the five-month and 11 -- week cycle coming together by Dec. 24. The proportionality of a potentially big price swing can also be anticipated due to the seasonality of the "Santa Claus rally," an event that usually occurs in the last five days of the year and continues into the first two weeks of January.

PIVOTAL ANALYSIS

Now let's look at the concept of combining different time frames (daily, weekly, monthly) for cycle studies with pivot point analysis to see what the results have been and what the potential is for determining future price projections.

First, let's point out one more issue on time. Any given month usually has four business weeks and 22 business days. In some instances, if you break it down, one day of one week in a given month will establish a high and/or a low, thus creating the range for that month. How can traders break that down to help determine what the high or low for that time period will be? Trendlines or prior price targets help, but using pivot point analysis for all time periods may improve your timing for entry and exit points.

Most novice individual investors and even brokers are not familiar with the pivot point formula. Most inexperienced investors have a hard time incorporating this technique into their trading "toolbox" because of the time it takes to calculate the numbers. But make no mistake about it, professionals look at pivot points, and so should you.

The pivot point (P) number is the high (H), low (L) and close (C) added together and then divided by three. …

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