Trading Strategies Using Pivot Points

By Jeff Friedman

There’s no doubt the economy is sick. The last quarter of 2008 and the first quarter of 2009 are likely to reflect the worst part of this recession, in my opinion. If that is the case, we may be seeing the formation of bottoms in a number of markets.

The December unemployment report of 7.2 percent was nothing to be happy about. Unemployment, tight credit and weak housing data, among other things, are continuing to weigh down the economy. 

You can’t trade a market unless you are familiar with the fundamentals and broad themes in the market. Once you know the fundamentals, I recommend using technical analysis to determine entry and exit points.

Pivot point analysis is my technical tool of choice. I used pivot points daily in over 10 years of trading on the floor of the Chicago Board of Trade and now help clients trade using these support and resistance levels. Many of the trading recommendations in this article are based on my pivot point analysis, which take into account high, low and closing prices, as well as volatility. If you’re interested in receiving a copy of my daily and weekly pivot point reports, feel free to contact me by phone, 866-231-7811, or email, jfriedman@lind-waldock.com.

Sell Bond Market Rallies

Let’s start with the bond market as it has been one of the few markets that has rallied as investors went searching for safety. The belly of the yield curve is continuing to attract investors. Investors are more interested in five-year and 10-year Treasury notes than 30-year Treasury bonds. Keep in mind that there is still fear present in the market, and that has kept bonds strong. However, I would recommend selling any sharp rallies in the bond market.

The 30-year Treasury bond is seeing support near 132 and resistance near 136, as indicated by the chart below. I would recommend selling the March contract at its current levels near 135, with a stop and reversal of the position at 136. I expect this market to fall, but I could be wrong. And if I am, and the market breaks through resistance of 136, I recommend reversing your position and going long to catch a strong rally.

More Pressure for the Euro

On Thursday, January 15, the European Central Bank is expected to lower interest rates by 50 basis points. That expectation has put pressure on the euro, and I think the euro will continue falling in the short term.

The weekly pivot point in the March euro futures contract is 135.38. If the market rallies to this point, I would be a seller. If the market makes a lower low near 133.30, I would recommend shorting the euro with the target of 130.46. If it continues making lower lows, I’ll go with the momentum of the market. I’m not trying to pick a bottom here.

Crude Oil Oversold?

In the energy markets, crude oil traders have been in complete panic-mode selling. Crude oil traded below $38 a barrel on Tuesday, January 13. The low in the February futures contract was $35.13 on December 24. Goldman Sachs recently projected that crude oil could trade as low as $30. However, keep in mind that these are the same guys that predicted in May of 2007 that crude oil would reach $200 a barrel.

The dominating force driving crude oil is deflation and the recession. The commodity is almost detached from supply and demand. In my opinion, I think crude oil is a little oversold. The weak economy has made crude oil week, mainly from a demand standpoint. However, I believe that the fundamentals of supply and demand in this market should change very soon.

If crude oil stays below $43.56 this week, I recommend that you stay bearish. Crude oil’s support level is near $36.35, so I would recommend getting long around $36.94 with a stop at $34.80 for a swing trade. I think this market is oversold, but approach it with caution. If crude makes a new low, I could see crude oil falling to $30. However, if the market gains strength, and breaks above $43.56, I would be an aggressive buyer.

Swing Trading the S&P

In the last couple weeks, we’ve seen a sideways market in the S&P 500. Generally, if a market is below the 10-day moving average, you should probably be bearish, from the standpoint of a swing trader. And when you look at the fundamentals driving the stock market, there are plenty of reasons to stay bearish.

If you’re looking for a swing trade in the S&P, I would recommend buying the March contract near 855 with a stop at 845. I recommend risking 10 points to make 20. If the market goes against you, you’d get stopped out at 845 and would then look to reverse your position and go short with a new target of 815. If the opportunity to buy at 855 does not present itself and the market rallies away from your order, I recommend trying to short the market near 897, with a buy-stop near 905.

There are several important  reports to keep your eye on this week. Most importantly, be on the lookout for retail sales figures, which come out on Wednesday, January 14, and industrial production numbers, which come out on Friday, January 16. The consumer and producer price indexes (CPI and PPI) are also due this week, but are not nearly as important because investors are currently not worried about inflation.

If you’re going to trade, you need to pay attention to the technicals. How else can you determine entry and exit points? In my experience, pivot points have provided a disciplined way to approach swing trading. At my trading desk I provide daily and weekly pivot points to help guide my clients in their trading. If you’re interested in learning how pivot points can be incorporated into your trading, feel free to contact me directly.

Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page. You can view an archived webinar of this forecast at www.lind-waldock.com/events, where Jeff covers even more detail.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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