Often, the best trading tools are the simplest, and pivot points qualify. They are handy tools for day traders to predict potential market turning points. That said, as with most indicators, pivots never should be used in isolation, but with a combination of complementary tools, such as candlestick charts, MACD and stochastics.
AutoZone provides a good example of using pivot levels to trade both the long and short sides in one day. On Dec. 29, 2011, AutoZone recorded: high, $329.31; low, $325.40; close, $326.25. This offers the following pivot levels:
P = 327.1
R1 = 328.6 S1 = 324.7
R2 = 330.9 S2 = 323.1
R3 = 332.5 S3 = 320.8
“Zoned for profits” (below) shows a five-minute chart of AutoZone on Dec. 30. The stock gapped down at $324.88 on the open. However, as the market trades higher, we look to go long above our $327.10 pivot. With the interim low relatively far from the current price, we opt to use a one-point stop loss at $326.10.
The first target for the trade is R1, or $328.60. At this level, the decision is the same: book profits or move the stop loss higher. The second target for the trade is R2, or $330.90. However, AutoZone was unable to stretch that far, and dropped lower, triggering the stop loss.
As the stock moved below the pivot level, we can opt to place a short trade at $327.50 with a stop loss at $328.60 and a profit target of S1, or $324.70. AutoZone eventually reached $324.70 in last hour of trade, allowing us to book our profit.
Bramesh Bhandari trades the Indian stock market and teaches technical analysis to traders. He can be reached at email@example.com.