**Gauging the
Strength of a Market Move **

Most traders and
investors are familiar with the saying "the trend is your friend." But deciding
what constitutes a trend often proves challenging because it depends on the
trader’s preferred time in the trade. Furthermore, once a trend has been
identified, the trader must determine its strength.

In his book *
The Logical Trader*, Mark Fisher describes a number of techniques to help
his reader spot trend breakouts and identify their strength. As we see in the
article "Spotting Breakouts as Easy as ACD," Fisher’s ACD trading system uses
intraday data to identify the daily opening range for finding trades. But this
intraday ACD technique may not appeal to the long-term trader or investor. Here
we look at how the technique can be applied to a longer time horizon.

**Opening Range**

In "Spotting Breakouts as Easy as ACD," we look at how short-term trades are
entered on a five-minute chart. Using the first five to 30 minutes of the day,
depending on the equity or commodity, we determine the opening range high and
low. 'A ups' and 'A downs' are then calculated based on a set number of points
above or below the daily opening range. In figure 1 below, we examine the stock
Broadcom (BRCM). An A up (A down) (green lines) occurs if the price of the stock
moves $0.27 above (or below) the opening range.

Figure 1 – Five-minute chart of BroadCom (BRCM). Chart provided by MetaStock.com

**Monthly
and Half-Yearly Opening Range**

Opening range can also be applied to longer periods. Just as the daily opening
range has a greater chance than other times throughout the day of being the high
or low, monthly opening range (OR) has a greater chance than another day in the
month of being the high or low for the next 20 or so trading days. Once the
trader knows this fact, it can be exploited to better the odds of making money.

This is also true of the first two weeks (10 trading days) of each six-month period. The high and low set during the first two weeks of January and July often represent an important area of support or resistance for the next five and a half months.

The good news is that both monthly and half-yearly opening ranges are very easy to calculate. Simply take the high and the low of the first trading day of the month for the monthly OR, or take the first 10 trading days in January or July for the half-yearly OR, and draw two lines across your chart. If price breaks above the high, a bullish bias is adopted. If it breaks below the low line, a bearish stance is taken.

Monthly opening
range is plotted in figure 1 (orange lines). We see that after breaking down
through the monthly opening range, the stock continued to trade lower,
confirming a medium-term negative market bias. Advance warning of the breakdown
was provided by the bearish divergence on the relative strength index (RSI) in
the upper window of the chart in figure 1.

**Pivot versus Pivot Range – Vive la difference **

Most experienced traders are familiar with pivots. A pivot point is simply the
point at which a security changes direction and is therefore a turning point. A
pivot low price bar has higher bars before and after it so that the formation
looks like either a "V "or "U." A pivot high looks like the mirror image of a
pivot low.

Pivots signify the end of a short-term move and minor reversal or the end of the dominant trend and a major change in direction. Pivot points are used to calculate Fibonacci levels of support and resistance (which we discuss in this article), swing trade entry and exits, and in a host of other trading techniques.

A pivot range is also based on the high, low and close, but is calculated somewhat differently than a pivot point. As the name implies, pivot ranges have a high and low limit.

Here is the
calculation from *The Logical Trader*. The same formula is used to
calculate daily, monthly and six-month pivot ranges, but note that for the
monthly, the high, low and close of the first day of the month should be used.
And for the six-month pivot ranges, the high, low and close of the first 10
trading days of January and July should be used:

- Pivot price
(also equals formula for a pivot point) = (high + low + close) / 3

- Second number
= (high + Low) / 2

- Pivot
differential = daily pivot price – second number

- Pivot range
high = daily pivot price + pivot differential

- Pivot range low = daily pivot price – pivot differential

In figure 2, the monthly (blue lines) and six-month (orange lines) pivot ranges are plotted for Broadcom. In both cases, the pivot ranges acted as either resistance (when in a bear trend) or support (bull trend).

Figure 2 – Daily chart of Broadcom with monthly (blue lines) and half-yearly (orange) pivot ranges. The green and magenta lines are a 20 and 50 day moving average. Chart provided by Metastock.com

Like opening range, pivot ranges can be used to execute trades. Similar to an ACD trade, A ups and downs as well as C ups and downs are used, but because the trader is using longer time frames, larger values are employed than when the daily values are calculated (not shown in figure 2). When trading Broadcom, instead of using an A up of $0.27 to trade short-term using the daily opening range, the longer-term trader would apply a half-year A up of $2.50 to $3.00 above the half-yearly pivot range, depending on volatility and stock price at the time.

The time frame is
different but the concept is the same. The goal is to identify breakouts, assess
their potential, and then trade accordingly.

**Three-Day Rolling Pivot**

Another technique for helping traders spot breakouts is the three-day rolling
pivot. When the three-day rolling pivot range is below the price action, long
trades are favored and when above, short trades are preferred.

Figure 3 – BRCM five-minute chart showing the three-day rolling pivot range with A ups and A downs. Chart provided by Metastock.com

In figure 3, a buy signal is generated on March 1st (number one) when the price breaks through the A up. A long trade is further confirmed by the fact that the three-day rolling pivot is acting as support. The stock then begins to trade in a range in which the three-day rolling pivot turns from support to resistance by March 5th. When the stock drops through the A down at point 2 on March 6th, a sell is generated.

Here is the calculation for the three-day rolling pivot:

- Three-day
rolling pivot price = (three-day high + three-day low + close) / 3

- Second number
= (three-day high + three-day low) / 2

- Pivot
differential = daily pivot price – second number

- Three-day
rolling pivot range high = daily pivot price + pivot differential

- Three-day rolling pivot range low = daily pivot price – pivot differential

**Putting
it All Together**

Fisher’s point in *The Logical Trader* is that opening range and pivot
ranges are methods used by his professional traders to gauge overall market bias
and are more powerful than simply relying on standard support/resistance. How
are opening and pivot ranges used together?

- If opening
range < pivot range < close = plus day and the trader is bullish.

- If opening range > pivot range > close = minus day and the trader is bearish.

For example, if
opening range is less than the pivot range and assuming there is some room
between the A up and the pivot range, a long trade could still be taken. But
fewer shares would be purchased, since the trader knows that the price has a
strong probability of stopping or reversing when it reaches the pivot range. But
when the price trades above the opening range *and *pivot range, the
trader has a higher degree of confidence that the trade has some room to move,
so he or she buys more shares as it is now a plus day.

Opening range provides a wider area with a probability that it will either be the high or the low of the period under examination. The pivot range, whether it is daily or half-yearly, gives another point of reference for support resistance. By plotting these values on the chart, a trader can immediately see when the stock or market is gaining or losing strength and momentum.

Designating where opening range and pivot range are in relation to each other and to the current price helps the trader decide how much confidence can be used when placing a trade. This information is highly useful in making trading decisions. And, like any reliable technical trading technique, it is one that works in all time frames.