The Best Predictive Indicator

The Best Predictive Indicator

The best predictive market analysis tool is the pivot point, especially when using the higher time periods, such as the monthly and weekly time frames. We did cover the power of confluence, which should never be ignored. Using the monthly time frames, any investment vehicle like forex, futures, and stocks, especially after a market starts to form a doji on a daily chart, is a sure sign that there is a strong possibility that a price or trend change is about to occur.

 A great example of using this method to help uncover a potential disaster in the stock of clothing retailer American Eagle Outfitters was used in mid-July. Taking the trading data from June as shown in Figure 8.27, the Pivot Point Calculator shows the monthly R-1 was 32.86 and the R-2 was 35.07. The actual high was 34.04, right in the middle of the target resistance levels.

One thing interesting here is that in Figure 8.28, the variation evening doji star does create the low close doji setup and indicates that the bullish momentum, or uptrend, had stopped. However, the market traded in a consolidation range for two weeks before the trend reversal occurred. The trigger to go short was not elected because there were two elements missing: (1) The market did not close below both moving average values; (2) the shorter-term moving average did not cross below the longer-term moving average. Those variables came later, as you can see on the chart. But the fact is that the monthly pivot point kept the market from establishing further gains; and the low close doji trigger was a significant warning to exit longs, buy put options, or at least tighten stops or move stop orders up to protect profits from long positions. The initiative to sell short was also a very viable action. Using a stop-close-only above the doji’s high, a trader would not have been knocked out of the short position at any time.

One of the more popular stocks in 2005, which mystified traders as it made a stratospheric rise, was Google. Figure 8.29 shows the price move that many thought would never end. Stock analysts were making upgrades calling for 600 per share in the first week of January 2006, and some were claiming as high as 2000. As you can clearly see, the low close doji pattern foretold of the market top; more important, it traded near the monthly R-2 resistance level of 466.95. Once again, here was a high-profile stock that formed a major top with an LCD trigger at a monthly pivot point target resistance number.