- August 13, 2022
- Posted by: CoachShane
- Category: Trading Article
Pocket pivots are a way to identify institution’s footprints within a base or an uptrend. Institutions generally buy within consolidation periods and pocket pivots can tip traders off to when this is happening.
Who really moves the markets? Institutions and knowing when they are involved can be an important piece of information for a trader. Do you really want to be involved in an instrument that doesn’t have big money behind it?
What Is A Pocket Pivot?
The pocket pivot is a potential buy point in a stock that was identified by Dr. Chris Kacher. It occurs when a stock makes a high-volume move up on a day where the volume is higher than any of the down volume days of the prior 10 days. They focused on companies with strong fundamentals and were, generally, leading companies.
At the time of the pocket pivot, we want to see the stock in a basing pattern with little momentum. While basing patterns are usually thought of as areas to trade breakouts, the PP gets a trader in before the break of the resistance zone. When trading breakouts, I’ve always been a proponent of trying to find an entry prior to the break. Usually, this came in the form of a smaller range inside the base or if price was basing right under a resistance zone and with a reversal type candlestick.
Why is “frontrunning” a breakout a good thing?
Getting into a move before the breakouts occur can often times have a better risk profile because you are entering somewhere around a support zone. When the breakout occurs and you are already on board, you can see your position in profits and have space to adjust your stop to remove risk.
We can also see a viable pocket pivot occur after the breakout. Some traders will look around the 10 period EMA for the pattern for a more objective approach of when the PP is worth looking at. With these continuation types of plays, we want to see a strong trend in strong stocks in order to find utility with the pocket pivot.
While many look for high volume on breakouts, there are times that legitimate breakouts happen on low volume on the day of the breakouts. What we see within the next few days is an increase in volume to validate the breakout was a success.
How To Find Pocket Pivots
Out of the entire universe of stocks, a trader only wants to focus on those that have a strong fundamental backing. Kacher recommended traders look at stocks with strong quarterly figures, great profit margins, ROE (return on equity), and the like. Using a screener such as Finviz can help you find stocks that fit the fundament characteristics that you like. Simply by using the dropdown boxes and selecting positive/very positive, you can narrow down your list quite quickly.
For a quick and dirty method of finding stocks of interest, traders could also look at the analysts ratings of stocks for buying suggestions.
Next up, we want to look at the volume indicator. We are specifically looking for a day where the up volume is higher than any of the previous sell volume over the past ten days (there are also 5 day pivots but we’d like to see them clustered together).
We then want to see if price is currently close to the ten day moving average. What we don’t want to do is buy when price has extended too far from an average price as mean reversion could be setting up. What is too far? That is subjective but a closing price that is further than 8-10% away may be too extended. I generally use between 3 and 5%.
Above all, we want to see some type of chart formation that is a consolidation. The “V” type reversals that contain a pocket pivot, especially for the continuation play, have a tendency to be of a lower probability than a good basing pattern.
Using Moving Averages
Another indicator to add to your charts are the 50, 200, and as mentioned earlier, the 10 day moving average.
We want to see price above the 200 and best case, above the 50 on all stocks we are interested in. If price is bouncing off the 200 DMA that is also a viable location as long as we see a basing structure. Also consider that a longer term downtrend (5+ months) is not where we want to trade these formations. Traders will wait to see the rounding out of the downtrend before considering trading.
Trading Pocket Pivots
These examples all have the moving averages that were mentioned above. I also added a 50 day average volume greater than 200K plus stocks >$5 and US only.
This stock had price whipping around the averages and I used the condition of price breaking a downward trendline for confirmation. Price is within 4% of the 10 SMA and those green bars show the pocket pivots location. The area near the arrow is a tightly congested price zone compared to the left of the arrow. A trader would note the pocket pivot and either enter there or look for weakness to get in. Weakness could be an inside bar (lower time frame consolidation) or a bull flag. When using pullbacks, as with any pullback, we do not want to see momentum against us during the corrective decline.
In the past, pocket pivots were designed to be bought on strength. However, as sure as the markets can change, so did how to use them. Now, we want to find the pocket pivot and look to buy during weakness that may appear afterwards.
This next daily chart is a great example of both the PP weakness play and the continuation of a strong trend.
We can see the tight consolidation in the middle as opposed to the sloppy price on the left. We see price form a base right under resistance (my preferred condition), a pocket pivot formed, and then we get some weakness at the small black arrow. A trader can use a break of that high for the long.
Price takes off to the upside, breaking a larger resistance zone. Price pulls back, lazy, to the 10 SMA zone. The next day, we get a pocket pivot and a buy point.
Stop Loss Zones
Basing patterns can give a few zones for your stop loss. The obvious one is under the entire basing pattern. Traders can also look to place their protective stop inside the range.
On the continuation plays, general stop location is under the low formed when price reversed.
Which stop you choose is personal preference with some traders even using an ATR style stop loss technique.
Pocket pivots can be a helpful tool for traders when trying to identify entry points in strong stocks. By looking for stocks that are consolidating near resistance levels, traders can find an early entry into a basing stock and be involved prior to the actual breakout of price.
Using the 10 SMA, traders can tell if a stock is too far extended and ready for a pullback. Finding pocket pivots around the 10 period average is an important piece of this volume pattern.
Additionally, by using the 50 and 200 day moving averages, traders can get a sense of the trend, and depending on the price relationship to the averages, if too much weakness has set in.
Finally, by placing stop losses below recent lows or below the entire basing pattern, traders can protect themselves from downside risk.