Trading Pocket Pivots

Hunting For Pocket Pivots using ChartMill Screens

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Hunting for Pocket Pivots Introduction Pocket pivots were originally designed by Chris Kacher (Dr K) in mid 2005 to address some problems by trading the difficult "trendless" markets of the new millennium. As you might have experienced yourself, markets started to behave in quite a different way since 2000. In the 90s almost every breakout experienced follow through, but last decade, lots of classical breakouts or famous cup-with-handle patterns failed, leaving investors with frustration and draw downs. In this context, Chris Kacher started searching for a more reliable alternative to get into stocks, before the actual breakout occurs. This alternative can help you lower the average cost as you begin building an initial position in the stock. This document does not want to be exhaustive. We strongly advise you to read the two excellent books from Chris Kacher and Gil Morales: Trade Like an O'Neil Disciple How We Made 18,000% in the Stock Market. Trading in the Cockpit with the O’Neil Disciples.

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Enjoy! Michel Lahaye Co-founder Chartmill.com

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What are pocket pivots? A pocket pivot is formed when the stock is coming " ... up and off or up and through the 10-day or 50-day moving average, or both in some cases". (Kacher, Morales, Trading in the Cockpit). This setting can be further fine tuned in our Chartmill screener to your wishes and even a threshold can be filled in to clearly define the boundaries of the "up and off" movement around the averages. Second rule for a pocket pivot is that it must occur " ... with a particular volume signature" . The particular volume signature means that the volume of the pocket pivot is higher than the highest down volume in the last 10 days. This rule is automatically included when choosing for a pocket pivot scan in the Chartmill screener. Of course, not every candidate that appears in the screen is a good one!

It’s not just about “a burst through a moving

average”. Investors should be specifically on the lookout for strong

fundamental

companies

with

good

stories

and

institutional sponsorship behind them. Combined with a linear, constructive basing pattern it forms the “conditio sine qua non” for a quality pocket pivot buy point.

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Finally, general market context plays a crucial role in finding and interpreting pocket pivot buy points.

As with everything in

investing, hunting for pocket pivots goes together with experience and situational awareness of the context in which these pivots are arising. If you are willing to put some effort and joy in it … we would strongly advise you Chris’ and Gill’s second book – Trading in the Cockpit. It does a great job explaining real life application and interpretation of pocket pivots based on thousands of questions they had from members and readers. So remember: a) Prices burst through 10 or 50 MA (boom!) b) Volume higher than highest down volume over last ten days (the bigger, the better baby). c)

Fundamentals, institutional sponsorships and stories MATTER! (yes, sir!)

d) Aah yes … (general market) context matters too!

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How to compose a pocket pivot scan? Traders can hunt for pocket pivots if they go to our website www.chartmill.com click on "screener".

You can use the Chartmill screener in two different ways: 1)

Scan for new pocket pivots that are formed today based on our own database of stocks. However, keep in mind that the Chartmill database doesn't hold fundamental data.

2) Use a fundamental list (for example: investors.com or the free stocktwits50.com) and put your tickers into our screener.

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METHOD 1 If you go for the first option, adding some extra criteria can help you find better stocks. It's advised to exclude low priced, volatile and illiquid stocks. Pocket pivots are originally designed in a growth investing context with the underlying philosophy that accelerating institutional sponsorship will drive stock prices higher. Institutions like decent stocks with strong fundamentals because they "don't like to be burned alive, trading illiquid crap" (however, some institutions do like to be burned alive, but that’s another discussion). It's strongly advised to include: a) Volume: at least 500.000 shares per day b) Price: at least 5 dollars c)

Markets: US only

d) ETFs: none ETFs are mean reverting by nature so they are best avoided. However - some of the ETF's CAN be traded with pocket pivots (like SLV, GLD, ...).

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Basic screen settings

Don’t forget to choose “Pocket Pivot Today” in the signal list. In order to have some visual confirmation, you can choose to add those two important moving averages and the pocket pivots view in chart settings below:

You can also save both screener and charts settings by registering on Chartmill.com and clicking on the save buttons.

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If you scroll down you have some other handy options:

Let me show you three useful views which I use often to trim down those candidates easily: 

Quickcharts Quick charts gives you a fast overview of all candidates that roll out of the screener. I use Quick Charts quite often to visually spot trading opportunities. Every chart can be marked and further added to your own watchlists.



StockTwits With this special view, you can find out what other investors think of each candidate in the screen. This option displays the chart of every candidate, next to their tweets from the famous StockTwits network.



CSV Chartmill fans asked for a csv- possibility where all candidates are divided by a comma.

Just copy your

favorite candidates and paste them in your software.

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Quick Charts View

StockTwits View

CSV Ticker View

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METHOD 2 Method 1 consists of finding pocket pivots on a technical basis and checking their fundamentals secondly. Method 2 does the exact opposite: you start off with a list of strong fundamental companies with great stories and scan them regularly for pocket pivot buy points. Growth investors like to use the original www.investors.com CANSLIM screening tools to compose a watchlist of candidates to trade from:

Image: Inve stors. com offers a dvanced fundamenta l screen in g opportunities for trade rs u sin g the CANSLIM © methodology.

If this service is too costly or advanced for you, you can always check the free “StockTwits 50” list. Together with some nice insights offered by Ivanhoff you can do more than fine, only trading this list.

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Image: StockTwits offers a gre at free list for in vestors http://www.stocktwits50.com

At this very moment, we are working on an function for including this fundamental list automatically into Chartmill. However, this is still work in progress. In the meantime, investors who want to implement this list can use the following procedure: 1.

Copy the ST50 from stocktwits50.com

2.

Paste it into an excel file.

3.

Copy the ticker column in excel.

4.

Directly paste the column in the Chartmill Screener.

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Note: It’s even better to create a new watchlist containing the entire ST50 and load them directly into the screener using the load watchlist function. For more information on how to create watchlists and save screener settings visit our documentation page. Remember a) Not every pocket pivot point in a stock is a buy. Always check fundamentals / stories behind the ticker. b) A good free and sound list is the StockTwits50. c)

A well known (payed) resource is investors.com

d) Use the save button in Chartmill for saving both watchlists as screener settings to speed up the process.

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Important Notes on Selling Kacher and Morales recommend putting some simple, easy-tointerpret indicators on your chart to follow up your position. As we already mentioned before: these indicators are the 10, the 50 and the 200 day simple moving average and volume. The moving averages are used both for determining the pocket pivot buy point and to determine selling points.

After

painstakingly observing price action of thousands of leading stocks, Chris and Gil discovered that most of them adhere to a certain moving average. This can be the 10, the 50 or sometimes the 20 MA. Investors can use this observation for using averages as further guides to place stops and take profits.

This chart shows two pocket pivot points from the 10 MA: begin January and the end of February (which can be described as a

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continuation buy point). It looks like LNKD mostly adheres to the 10MA which can thus be used as a selling guide. By the way - that large gap up could also be seen as a buy signal, but this is described by Dr K and Morales as a “buyable gap up”. Those gaps can be extremely powerful signals and can also be traded successfully according to our VOSI friends. However this would lead us to far of topic for this publication. Important note: Only if price closes below the moving average and is followed next day by a break of the low, than you can decide to sell (or diminish the position).

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Important Notes on Market Conditions Also known as the M in CANSLIM, the general market context is vitally important to raise your chances of success. Although some stocks can buck the market’s moodly swings, the majority of stocks still follow the underlying market trend. It is true that Kacher and Morales take setups in any market environment (on a “individual-stock-basis”), it's not a bad idea not to use all of your gun powder in sloppy, volatile, no- go markets. We advise traders to position size smaller in times were markets are not rewarding momentum and to increase size rapidly if more pocket pivots show up and more follow-through is seen. Market timing can greatly increase your performance while trading

growth

strategies

because

people

(and

mostly

institutions) keep on blindly pouring in money into stocks. Market timing can be done by simply following market breadth indicators like number of stocks above 20 or 50 MA or by closely monitoring indexes and their underlying values. A good start is our market breadth page, or the adjusted “Buy Don’t Hold model” , based on Leslie Masonson’s model.

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Remember: not a single setup or methodology is perfect. Trading is more art than science. Think in terms of probabilities than in terms of certainties, avoid the perfectionism trap. Whatever you choose, try to develop a procedure. After a while you get a feel for it, just by observing live market action. We wish you good luck! Michel Lahaye Co-founder Chartmill.com

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