(Kitco News) - Traders sometimes joke that the key to success is buy low and sell high. The joke, of course, is that's easier said than done-- just how does somebody know when any market is high or low compared to the future?
Longtime trader John Person tries to anticipate such levels through pivot-point analysis. Only whereas most traders historically used pivot points based on the prior day's session, Person is among those who have helped popularize the use of pivot analysis using weekly and monthly charts.
This sent him a warning signal against buying into the world's largest gold exchange-traded fund this month right before a $65-per-ounce correction lower in gold prices.
Person is a commodity trading advisor and president of NationalFutures.com. He is co-author of the Commodity Trader's Almanac, has written three other books and been a featured speaker at numerous trading seminars over the years.
Pivot-point analysis helps traders gauge a possible range for a market during a certain period of time, whether daily or monthly, using formulas with past price ranges. The pivot itself is typically viewed as an initial support or resistance level. The formula: Pivot point = (High + Low + Close) divided by 3. When a market moves above or below pivots, there are formulas to determine additional support and resistance levels, such as S1 or S2, or R1 or R2 (listed at end of story.)
"They measure not only price, but price in a specific time," Person said. "Then they give you a futuristic look as to what the potential support and resistance targets could be."
Person has also constructed moving averages on the basis of pivot points, rather than the more widely used moving averages based on actual prices. This offers him an indication of whether a market is bullish or bearish, based on whether the price action is above or below the moving average.
"Then I use pivot-points as a support and resistance tool," he said. If he is bullish, he might buy into a market when it falls to a support level. Conversely, he might take his profit if the market rises to a resistance level.
He is also hesitant about buying at resistance, since by definition this is a chart point where technical traders see potential for a rising market to stall. This kept him from entering a position in SPDR Gold Shares ( GLD ) recently just before a price pullback, he said.
Specifically, this was due to a so-called monthly R1 resistance level determined by this formula: Pivot x 2 - Low. For GLD, using the February high (138.20), low (129.28) and close (137.66), this R1 resistance for March stood at 140.81. Thus, even though Person described himself as "fairly bullish" on gold in the long term, he opted against entering into a long position in early March. This helped him avoid a near-term decline when the ETF shares stopped at 140.61, just ahead of Person's anticipated resistance, and subsequently fell back several dollars.
No form of technical analysis is reliable all of the time, but the pivot analysis helped him in this instance.
"Knowing there is overhead resistance, and knowing that professional traders are looking at those same numbers, is something that may help you to potentially take a decent profit at the right time or keep you from buying at the wrong time," Person said.
He credits pivot analysis for letting him stay in the business for more than three decades. "It keeps me from buying high and selling low."
Person's Career Jump-Started By Chance Meeting On Train
Person's introduction to the trading world began in 1977 when he got a job as a "runner" at the Chicago Mercantile Exchange, delivering customer market orders to brokerage's floor traders. Three years later, a career-altering event occurred by chance one night when he was studying for a college test class while riding home on a train.
Unknowingly, he had sat down next to one of Chicago's most famous traders at the time-George Lane, often referred to as the Father of Stochastics.
"I was studying for an exam and had my book open," Person recalled. "He asked what I was studying. I said economics. He handed me his business card and said, 'Why don't you come see me?'"
Lane gave Person a job. He taught a young Person about using fundamental analysis such as grain supply/demand reports and money-supply data. He also introduced Person to technical analysis, such as chart patterns. Person helped Lane produce a regular newsletter.
"He was certainly a very integral part of my career and was my mentor," Person said.
Stochastics, like the Relative Strength Index, is an oscillator that helps traders gauge when markets are oversold or undersold. Person continues to use this tool, even though much of his current focus is pivot-point analysis. He also monitors bullish convergences and bearish divergences, as well as moving averages.
Lane also taught Person the importance of learning seasonal tendencies in commodities. For example, in grains, markets often hit what are referred to as "harvest lows" when global supply increases as farmers are combining corn and soybeans. In the case of gold, seasonal tops often occur in roughly February, when jewelry buying for many of the world's holidays subsides. And seasonal strength tends to kick up again in late summer ahead of a number of holidays around the world, including autumn festivals in India, Christmas in Western nations and the Chinese New Year.
Person encouraged novice traders to not only learn how fundamental factors such as news and supply/demand issues affect markets, but also to study various forms of technical analysis. He also advocates protective sell stops to exit and limit any damage from losing trades.
"It seems to me that more people plan their weekends (better) than they do their trades," Person said. "If you're going to invest hard-earned cash…study and find out all you can about technical tools. It will build your confidence and therefore help you trade markets."
How To Calculate Pivot-Point Support And Resistance
Person relies upon pivot-point analysis so much that he includes an automatic calculator for support and resistance under trading tools on his Web site. The link is as follows: http://www.nationalfutures.com/pivotcalculator.htm .
If a trader wants to know how the levels are calculated for both the initial pivot and S1, S2, R1 and R2 support and resistance levels, the formulas are below.
Pivot point = High + Low + Close divided by 3
First resistance: Pivot x 2 - Low
Second resistance: Pivot + High - Low
First support: Pivot x 2 - High
Second support: Pivot - High + Low
By Allen Sykora of Kitco News; email@example.com