Saturday, March 07, 2009

Pivot Based Price Targets and Historical Trading Patterns

I recently posted on the topic of tightening profit targets in the face of noisy markets. The market's restrained volatility means that traders need to adjust their expectations for directional moves.

I've now reconfigured the R1 - R3 and S1 - S3 profit targets and will begin posting the new levels via Twitter on Monday AM prior to the market open.

Meanwhile, I've begun looking at historical price patterns as a function of how markets behave relative to their targets.

For example, since 2000, if SPY hits its R3 upside price target, the next two days in SPY have averaged a loss of -.18% (273 up, 292 down). If SPY hits its S3 downside price target, the next two days have averaged a gain of .08% (330 up, 315 down). These reversion tendencies are significantly stronger when we look at whether the big up or down day occurs in an overbought or oversold market.

Shortly, I will incorporate pivot/target based historical patterns into my Twitter updates to provide a sense for possible sources of edge. These don't represent mechanical signals, but rather are intended as decision support to help traders see how markets have typically behaved under similar conditions. Those expectations then provide useful benchmarks for gauging the current market's behavior, as explained in this post.