Pocket Pivot: The Key Strategy for Stock Trend Investing

Definition

The Pocket Pivot strategy, introduced in Trade Like an O'Neil Disciple, is a technical analysis method used in trend investing to identify key buying points for stocks. The essence of trend investing lies in aligning with market trends—buying into established upward moves and selling during downward trends. The Pocket Pivot acts as a vital tool for precisely identifying these key buying points, especially at the onset or continuation of a stock's upward trajectory. Typically emerging at the base of a stock's chart, the Pocket Pivot signals an imminent breakout to new highs and offers continuous buying opportunities as the stock price ascends. When a stock, after an uptrend, experiences a pullback characterized by reduced price volatility and trading volume, and then surges on a particular trading day with a notable volume spike, closing above a recent key resistance level, a Pocket Pivot is confirmed. This signal suggests that bullish momentum is reasserting itself, and the stock is likely to embark on a new phase of rapid appreciation. For trend investors, it serves as a significant entry signal.

Calculation Method

  • RPS Indicator Screening: Use the RPS (Relative Price Strength) indicator to identify stocks with an RPS value that has consistently risen over the past 12 months and is not lower than 87. These stocks have outperformed the majority of others in the market. In trend investing, their strong market performance suggests a higher likelihood of sustained upward movement during an uptrend, indicating significant potential.
  • Stock Price Position and Moving Average Conditions: The stock price should be above both the 10-day and 20-day moving averages, with the 10-day moving average trending upward. This moving-average setup indicates that the stock is in a short-term uptrend, aligning with the trend investing requirement for a stock's direction. Additionally, it is crucial to manage the divergence between the stock price and the 10-day moving average to mitigate the risk of overpaying. When the stock price is near the upper edge of a previous consolidation area or has just broken through it, there is minimal resistance to upward movement, which is more conducive to trend continuation.
  • Key Judgment of Trading Volume: On the day a Pocket Pivot forms, the trading volume should exceed 1.5 times the average volume of the previous 5 days and be greater than the average volume of the past 10 days. A significant increase in trading volume reflects active market participation, providing the momentum needed for the stock price to continue rising during an uptrend and enhancing the reliability of the Pocket Pivot signal in trend investing.
  • Consideration of the Validity of the Breakthrough: The stock's closing price should break through the highest price within the fluctuation range of the past 7 to 15 trading days or a key resistance level. A valid breakout is essential for confirming the continuation of the stock's upward trend. If the breakout lacks sufficient trading volume or if the stock price quickly reverts to the original range after the breakout, the validity of the Pocket Pivot signal is questionable, and trend investors should proceed with caution.

Pocket Pivot and Cup-with-Handle Pattern

  • Introduction to the Cup-with-Handle Pattern: The Cup-with-Handle pattern was introduced by William O'Neil and is a well-known technical analysis model described in his book How to Make Money in Stocks. This pattern is commonly observed during a stock's uptrend and resembles a cup with a handle. The "cup" part is a U-shaped structure where the stock price initially drops and then rises, with trading volume gradually decreasing. The "handle" is a short-term minor pullback that occurs after the cup has formed, characterized by further contraction in trading volume. A significant increase in volume as the stock price breaks through the high point of the handle is considered a strong buy signal, aligning with the concept of trend investing, which focuses on finding entry points during an uptrend.
  • Relationship between the Two: The Pocket Pivot and the Cup-with-Handle pattern are closely related and complement each other in trend investing. During the formation of the cup part, if a stock exhibits a pattern that meets the Pocket Pivot criteria, it can indicate that the Cup-with-Handle pattern is nearing completion. This suggests a high probability of an upward breakout in the stock price, allowing trend investors to make early preparations. When a Pocket Pivot occurs during the formation of the handle or just after breaking through the high point of the handle, it aligns with the breakout requirements of the Cup-with-Handle pattern. This significantly increases the likelihood of the stock price rising and enables trend investors to better seize investment opportunities during the uptrend. Investors can combine these two patterns to determine optimal buying points and refine their trend investing strategies.

Applications of the Pocket Pivot

  • Precise Stock Selection: The Pocket Pivot strategy enables trend investors to identify potential stocks that are poised to initiate an uptrend or accelerate their growth during an existing uptrend. This enhances the likelihood of achieving profitable trades in trend investing.
  • Timing the Buying Point: This strategy allows trend investors to pinpoint optimal entry times. Investors can enter the market at the onset of a stock price increase or at the rebound point following a pullback during an uptrend. This approach offers high cost-effectiveness and low risk, adhering to the trend investing principle of "going with the trend."
  • Trend Tracking: By using the Pocket Pivot to monitor a stock's upward trajectory, investors can observe the stock price and trading volume after a Pocket Pivot forms. If the stock price advances along an upward channel with stable or moderately increasing trading volume, it indicates a robust uptrend, and trend investors can continue to hold the stock. Conversely, if the stock price breaks below a key support level or if trading volume significantly diminishes, it may signal a trend reversal. Investors should then sell in a timely manner to effectively manage risks in trend investing.
  • Portfolio Optimization: Incorporating the Pocket Pivot strategy into portfolio construction allows investors to achieve diversified investments. By selecting stocks from various industries and market capitalizations that exhibit Pocket Pivot signals, investors can balance portfolio risks. In trend investing, when the uptrend in some sectors ends or weakens, Pocket Pivot stocks in other sectors may still be in an uptrend, thereby enhancing overall portfolio returns.

Advantages and Disadvantages of Pocket Pivot

  • Advantages: The Pocket Pivot strategy offers several key advantages for trend investors. It accurately identifies the optimal buying point at the onset of an uptrend, helping investors avoid the pitfalls of buying too early or too late. By adhering to the core principle of trend investing—following the market trend—it reduces the risk of contrarian trades. Additionally, the clear and distinct signals facilitate quick stock screening and enhance the efficiency of investment decision-making, making it a valuable tool for trend investors.
  • Disadvantages: The Pocket Pivot strategy, while useful, is not without its drawbacks. During periods of market volatility, false signals can emerge, leading trend investors to misjudge the trend and incur losses. Additionally, the strategy is highly dependent on the market environment; in a bear market or during significant market declines, it becomes challenging to form or sustain an uptrend, which diminishes the reliability of the Pocket Pivot signal. Furthermore, the strategy primarily relies on technical analysis and pays relatively little attention to a company's fundamentals. If investors base their investment decisions solely on this signal and overlook fundamental factors such as financial health and industry prospects, they may face increased risks in trend investing.

Stocks Selected by the Website Based on the Pocket Pivot Strategy

Based on the Pocket Pivot strategy, the website updates the trading data of US market, HK market and CN matket daily and calculates the daily stock - selection results after the market closes.