Trading Pocket Pivots

http://www.chartmill.
com

Hunting For Pocket Pivots
using ChartMill Screens

http://www.chartmill.com
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 ONeil Disciples.
Enjoy!
Michel Lahaye
Co-founder Chartmill.com

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! Its 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.
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 Gills 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!

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.

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 thats
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, ...).

Basic screen settings

Dont 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.

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.
Quick Charts View

StockTwits View

CSV Ticker View

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:

I mage: I nvestors. com offers advanced fundamental screeni ng
opportuni ti es for traders usi ng the CANSLI M methodol ogy.
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.

I mage: StockTwi ts offers a great free l i st for i nvestors
http: / / www. stocktwi ts50. 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.

Note:
Its 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.

Important Notes on Selling

Kacher and Morales recommend putting some simple, easy-to-
interpret 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
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).

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 markets 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
Dont Hold model , based on Leslie Masonsons model.
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

Trading Pocket Pivots

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