Now I want to introduce you to another valuable lesson using this method of price forecasting. By taking the daily, weekly or monthly numbers you can target a price level and wait for confirmation from a recognized chart pattern. This can help you in taking advantage of the price swings from the market reacting off of those numbers. By having the calculations based on the different time frames, one can use them for day trading or swing trading.
Below in figure 4.5 is the Dow 10 dollar per point futures contract. Here you will see an hourly candlestick chart pattern. I normally use the 60-minute and or a 15-minute time period for my studies. In this example we see once again a good example of why this is not exact science. The S1 Support target for the trading session of 1/25/02 was 9751. The actual low was 9735. That is 16 ticks of slippage, which equates to 160 dollars on the 10-dollar per tick contract. By watching the hourly closing time period to see if a Bullish candlestick pattern appears at an important level of support or a Bearish candlestick pattern at an area of resistance, I am able to determine a trading plan with a higher degree of confidence.
In the example below, using the data from 1/24/02 (high 9855, low 9760 and close 9794) we calculated the S1 SUPPORT for the next day (1/25/02) at 9751. The second hour of trading on 1/25/02, a Bullish Engulfing pattern formed and generated a strong buy signal. The opening of the third 60-minute period gave an opportunity to go long near 9790 using a stop below the low of 9735. In fact, a stop could have been placed below 9750 so the risk would be down to 400 dollars (10 times 40 equals 400). Within one hour the market advances up to the 8960 and gives an opportunity to move stops up or get out of a long position near the R1 resistance number of 9846. Three hours later the price advances up to a high of 9895 generating an opportunity to liquidate the long position near the Daily resistance R2 of 9898.
The reaction of the market when it trades near these pivot numbers can be a significant bounce when near a support number or the market can simply stall before blowing through the support number and then continuing the trend lower. In my experience there is usually a “reaction” from the numbers. The longer time period (weekly or monthly) the calculation is from, the bigger the reaction can be. Really the only thing you as a trader needs is to get in the market, capture a significant price move, get out and profit from it with this Simple Strategy for Day trading or Swing Trading
The chart below in figure 4.6 is a 60-minute chart starting on Tuesday July 16th and ending on July 30th 2002. I am going to demonstrate how the Pivot Point Analysis, based on the weekly numbers, in one of the biggest down months in S&P history targeted the support level and called for the low within 9 points!
The week ending 7/19/02 had a high of 929.5 the low was 840 and the market closed at 844. The fundamental backdrop was so pessimistic with all the corporate accounting scandals, doubt that the economy could sustain growth, Middle East tensions were flaring and earnings were coming in weaker than expected. There were not many indicators that were calling for a low or a turn around in the equity markets.
Simple Strategy for Day trading or Swing Trading