Pocket pivots were originally designed by Chris Kacher (Dr K) in mid 2005 to address some problems by trading the difficult “trendless” markets of the new millennium. As you might have experienced yourself, markets started to behave in quite a different way since 2000. In the 90s almost every breakout experienced follow through, but last decade, lots of classical breakouts or famous cup-with-handle patterns failed, leaving investors with frustration and draw downs.
In this context, Chris Kacher started searching for a more reliable alternative to get into stocks, before the actual breakout occurs. This alternative can help you lower the average cost as you begin building an initial position in the stock.
A pocket pivot is formed when the stock is coming ” … up and off or up and through the 10-day or 50-day moving average, or both in some cases“. (Kacher, Morales, Trading in the Cockpit). This setting can be further fine tuned in our Chartmill screener to your wishes and even a threshold can be filled in to clearly define the boundaries of the “up and off” movement around the averages.
Second rule for a pocket pivot is that it must occur ” … with a particular volume signature” . The particular volume signature means that the volume of the pocket pivot is higher than the highest down volume in the last 10 days. This rule is automatically included when choosing for a pocket pivot scan in the Chartmill screener.
Of course, not every candidate that appears in the screen is a good one! It’s not just about “a burst through a moving average”. Investors should be specifically on the lookout for strong fundamental companies with good stories and institutional sponsorship behind them. Combined with a linear, constructive basing pattern it forms the “conditio sine qua non” for a quality pocket pivot buy point.
Finally, general market context plays a crucial role in finding and interpreting pocket pivot buy points. As with everything in investing, hunting for pocket pivots goes together with experience and situational awareness of the context in which these pivots are arising. If you are willing to put some effort and joy in it … we would strongly advise you Chris’ and Gill’s second book – Trading in the Cockpit. It does a great job explaining real life application and interpretation of pocket pivots based on thousands of questions they had from members and readers.