5.3. DEFINITION OF A POCKET PIVOT BUY POINT

Pocket pivot points in fundamentally strong stocks are preferable, and in particular one should constantly monitor the "big stock" leaders in any bull cycle for potential pocket pivot points. The Internet stocks in 1999, Apple and Google in 2004, and solar stocks in 2007 would have been areas to focus on for monitoring pocket pivots during those particular bull market years and cycles.

The idea behind a pocket pivot is that one is buying the stock "in the pocket," as a less-obvious but valid and reliable buy point within the stock's base. While many different buy points in a stock's chart can meet the definition of a pocket pivot, some can be improper, as we will see later in some of the examples.

Similar to what you would want to see in a proper base formation, a stock should be showing constructive price/volume action preceding the pocket pivot. Just prior to the pocket pivot, as the stock is moving within its overall base structure, tighter price formations, that is, less volatility should be evident in the stock's price/volume action as viewed on its chart. The stock should have been "respecting" or "obeying" the 50-day moving average during the price run that occurred prior to the time the stock began building its current base. This indicates that the stock's character is such that it can be expected to continue to do so. Therefore you can use the 50-day moving average in such a case as a sell guide if the stock begins to violate its prior "character," for instance, its habit of "obeying" or "respecting" the 50-day moving average. If the stock's character is such that it tended to "obey" or "respect" its 10-day moving average on its prior price run before building its current base, then you might expect to use the 10-day moving average as your guide for selling the stock. The stock's price/volume action will ultimately determine whether you should use the 10-day or 50-day moving average as your guide for selling the stock.

Except in very rare cases, such as in the aftermath of the crash of late 2008, pocket pivots should only be bought when they occur above the 50-day moving average. Ideally, the stock's price/volume action should become "quiet" over the previous several days, which contrasts with the much larger and stronger volume move that comes on the pocket pivot itself. On the pocket pivot you want to see up-volume equal to or greater than the largest down-volume day over the prior 10 days. We call this the proper "volume signature." If the volume has a habit of being choppy, in other words varying greatly from day to day, then you increase this to 11–15 days. Visually, this means that there should not be a lot of big, "spiking" down-volume bars in the chart over the prior 10 days as well as the stock's overall base formation. Ideally, volume should be relatively consistent over the prior 10 days, preferably drying up, and then should "burst" higher on the day of the pocket pivot, as is evident, for example in Jazz Pharmaceuticals (JAZZ) in Figure 5.3.

Figure 5.3. Jazz Pharmaceuticals (JAZZ) daily chart, 2009–2010. Very quiet sideways action with volume drying up followed by upside volume spikes, especially on the pocket pivot day.: Chart courtesy of eSignal, Copyright 2010