By John Person

I am delighted to see the success of the CBOT mini-sized Dow futures contract expand in popularity. Since I started covering this market nearly a year and a half ago in mid 2002, I saw an exciting trading vehicle and an opportunity for trading the all electronic mini-sized Dow contract. It has now ballooned to a 70,000 average daily trading volume and now has longer trading hours. Trading starts from 7:15pm - 4pm CST, Sunday through Friday.

Plus, due to the successful launch of the new e-cbot trading platform and CME/CBOT Common Clearing Link there is margin relief between two major US stock index futures contracts: 1:1 CBOT mini-sized Dow versus E-mini S&P 90% (initial exchange margins $650, maintainence $520) and there is a 3:1 DJIA /S&P 95% (initial exchange margin $1,750, maintainence $1400) - and best of all there is final volume and open interest data available the same day.

One of the best features of the Dow market is that it trades and responds well with different trading indicators and attracts a wide array of technical traders.

Out of all the methods and indicators available today, the most significant trading tactics that have given amazing results are combining Pivot Point analysis with Fibonacci Correction and Extension levels. These two forms of analysis offer traders a powerful leading price indicator, otherwise known as the "right side of a chart predictor".  We all know what's on the left side of a chart, how about on the right side, which is the unknown or the future.  What method or methods can we use to help us determine future price moves or reversal points?  Many people have labeled Pivot Point analysis as strictly for day traders, and as one which was reserved specifically by floor traders. The truth is it can be used for multiple time frames and not just for day trading.

This article will highlight the many benefits that a leading price indicator like Pivot Point analysis and Fibonacci price correction and extension calculations can offer you.  I am also going to give a breakdown of a recent trade analysis and dissect it in a step by step manor which used both of these techniques in determining the recent resistance point in the Dow near the 9900 level.

This article will also cover:

• The main features comparing Pivot Point Analysis versus Fibonacci studies
• Which Pivot point formula to use and why.
• How to choose the right Pivot support or resistance number.
• The background of Fibonacci ratio and series numbers

First let me explain that applying the Pivot Point calculations to predict Support and Resistance levels should be used for calculating the Daily, the Weekly and even the Monthly price ranges. The reason I believe this to be true is, if you break down the time frames of every month there are approximately 22 business days or about four weeks. In every week there are five trading days. If you consider that in every month there will be an established range, in other words a high and a low. In one day of one week in one month a High and a Low will be made. So it is likely that the high and the low would be made for a given month possibly in a minute or hour of a given day of a given week in that month. If that is true why would a trader not want to consider looking at the longer term time horizon such as a monthly or weekly analysis in their trading approach? Of course a trader would want to view that outlook, right?

Pivot Point calculations deliver a fast solution to this situation.  The one exception would be if the price action had an Open High, Low and Close all at the same price and stopped trading for a month, week or day. This would be the case of an illiquid market and would not be a considered trading vehicle. One of the main features regarding Pivot Point analysis is the fact that it relies on specific time frames in determining support and resistance levels for that timing element. Meaning the analysis or calculations for the prior day will not be applicable in most cases two, three or four days later. The same principle goes for the Weekly and Monthly calculations. So at the end of that time period I need to recalculate new data.

However, I do watch for "repetitive" or reoccurring support or resistance numbers that are calculated in different time frames. For example, if the daily resistance number comes up to 9900 and the weekly resistance number comes up to 9900 and a Monthly number comes up to 9900 there is a strong series of corroborating resistance points all targeting at that 9900. My attention span will be more focused on the market when it trades near that number.

I will give that resistance point even more consideration if there is a corresponding resistance number generated from prior time periods, different technical analysis such as Fibonacci studies that verify these numbers or more importantly past historic chart points such as old highs or lows.

Below is the most common formula used by traders. There are other variations that some traders use to help offset the difference between Night and Day trading sessions. I use the variation below and account for all trading sessions in my Daily Pivot Point calculations beginning from the night session's open until the day session's close. For the CBOT mini-sized Dow contract, I take the close at 4PM CST. For the Weekly calculations take the Open from Sunday night and then use the close on Friday. For the Monthly data take the opening of the First day of the month to the close of the last day of the month.

Let me elaborate on the Daily calculation.  I include the all session data for markets that trade twenty-four hours this removes the potential for  "gaps" to exist in the data. Most times, major economic reports are released at 7:30 AM (CST) one hour before the cash markets and Open Outcry pits open. Specifically, Monthly and Weekly Unemployment reports, Housing Starts, Consumer Price Index and the I Index are just a few that carry enough weight to make the markets move significantly before the day session's open. How about stock earning reports - they can and usually are released before the cash market bell rings or just after the close.

Using the electronic session's market trading times will account for the markets price reaction to these reports and you will be able to use the data in your analysis on a day to day basis. After all, just because the market is not open to trading in the open outcry pit does not mean that there is no validity in the pre or post session electronic market trade.

If you take it one step further I believe that if the market is open around the clock, like the mini-sized Dow futures contract, then if a trade is made it should be recorded in your analysis.  Some argue that there have been "bad" trades and the markets are illiquid at night.  On the contrary, I do not recall any erratic price moves that occurred in pre or post session trading, but we all have heard or seen electronic glitches during regular hours session!  Keep in mind that if the market is open and it trades, then the data should be recorded. The exchanges and quote vendors do and so should you.  One more fact to consider is that more and more traders are trading off the floor and are trading around the clock.  Average Daily Volume is nearing 70,000 contracts in the mini-Dow so there is ample liquidity too!

The Pivot Point formula below is the most widely used version to determine the Support and Resistance levels.

Here is the mathematical formula:
P= Pivot point; C= Close: H= High: and L= Low.               

The Pivot point number is the high, low; close added up and then divided by three.
P=(H+L+C)/3= pivot point

First resistance level take the pivot point number times two and then subtract the low.
(Px2)-L= Resistance 1

Second resistance, take the pivot point number, add the high and then subtract the low.
P+H-L= Resistance 2

First support take the pivot point number times two and then subtract the high.
(Px2)-H =Support 1

For the second support, take the pivot point number, subtract the high and then add the low.
P-H+L= Support 2

One variation that one can use is to include the Open in the calculation. The formula changes to reflect this, for example P=(O+H+L+C)/4.

With these five calculations how does a trader choose the right Pivot support or resistance number?  As with any market analysis there is no holy grail. However, there is a good rule of thumb to follow in choosing the right sequence of Pivot Point Numbers in your daily analysis is determining the next time periods trading range. First of all, take the R-1 and the S-1 of all time frames for your initial analysis. Especially in low volume, consolidating trading sessions this works well. The Pivot point can be used as an actual trading number in determining the high or low of a given time period especially in strong bull or bear market conditions. Also, consider this, if a market is in a bearish down trend then the highs should be lower and the lows should be lower than the preceding trading session, right?  In Bearish market trends I would use the actual Pivot Point up to the R-1 for resistance and the S-2 for support. In a bullish up trend the highs should be higher and the lows may be higher than the preceding time period. So I will use the R-2 and the S-1 to the pivot point for targeting the potential trading range.  If in a given trading day if the market goes through my Daily target numbers the importance of the weekly and even monthly numbers is what gives me an indicator for the next major target levels of support and resistance.

I also incorporate Candlestick Charting techniques to help me uncover market reversals.  Bearish Reversal Patterns such as Bearish Engulfing, Evening Doji Stars, Bearish Piercing and Bearish Harami formations are indeed powerful set up chart patterns.  The reverse of these are Bullish bottom pattern formations such as Bullish Piercing, Bullish Harami, Morning Doji Stars and even Hammers, which the mini-sized Dow seems to form with more and more consistency.

The CBOT mini-sized Dow has been a valuable trading vehicle that offers traders another avenue to invest their risk capital. Another great feature is that it affords my clients and individual investors additional leverage since it offers one of the lowest margins more than any other Stock Index Future product.  Since it only has 30 stocks to follow it is easy to correlate hedging or arbitrage strategies with individual stock options or even Single Stock Futures which all Dow component stocks are traded at OneChicago, the premier exchange for SSF's.

The CBOT mini-sized Dow responds well with Pivot Point Analysis and when you apply Fibonacci correction or extension numbers you have an extremely powerful price-predicting tool.

Fibonacci Studies

Fibonacci analysis is a popular but yet complex study. Most traders are familiar with the most common correction or retracement number, which is 50 %. There is a lot more to Fibonacci than just that. The main feature I want to point out is that unlike Pivot Point Analysis, Fibonacci Correction or Extension price analysis does not rely on timing but rather pure price action from price points.

There are cycle and time count studies that incorporate Fibonacci theories and rely on the coincidences or repetitiveness derived from the summation or series numbers which is explained below but exclusively the correction and extension price predicting methods only use the element of the past price points to help predict potential support and resistance levels sometime in the future. 

Fibonacci discovered that there was a relationship with adding numbers together and then the dividing relationship came up with repetitive percentage figures.  First of all let's go over what the Fibonacci summation or "series" numbers are.  Simply put they are an infinite series of numbers that adds each number to the previous. An example is 1,2,3,5,8,13,21,34,55,89,144, 233, 377, 610, 987 and so on. If you take 1 + 2 you get 3, then if you take 2+ 3 you get 5, and if you take 3 + 5 you get 8 and so on.

Fibonacci ratios are numbers derived from the calculations within the Fibonacci series numbers. The most common numbers are .382%, .50%, .618%, .786%, 1.00%, 1.272% and 1.618%.

The "Golden ratio" number is often referred to for the number .618% due to the many coincidences that reoccurs with that number. For example 89=+/- .618 of 144, 144 divided by 233 + .618, .382 + .618 = 1.00, .786 = the square root of .618%.  More importantly, if you divide any number of the Fibonacci summation series by the number that follows the sum will be close to .618.  For example, 13 divided by 8 = @.618, 21 divided by 13 = @ .618 .

With that information we have established that here are certain reactions with nature and as many great analysts in the past have pointed out that we can apply these math figures in our trading analysis. The most common approach is to use the Fibonacci calculations as a retracement tool. To do this we measure price retracement levels from point "A" to point "B". Take that figure and multiply it by the Fibonacci percentage number to get a "pullback" level.

Most traders at one point or another have seen a market retrace all the way back and even beyond their purchase price level, stop you out and then continue going back in the direction you anticipated or predicted.

Here is a great trading tip. Corrections can and do extend beyond 100% of the move. In fact 100%, 1.272% and 1.618% are the most often stopping points for full correction moves. Figure 1 shows the Fibonacci ratio correction levels.

Fibonacci numbers are widely used to predict market turns or price objectives on extended trends. Figure 2 above shows the way to calculate projected target resistance levels by taking the measurement of the range between point "A" and "B". Once that distance is determined multiply that number by .618%, 100% or 1.618% to get the projected resistance points.

Using the Monthly and Weekly Pivot Point analysis rather than just Daily as I pointed out in the beginning of this article, we have a much better outlook on the potential High and low for that next time periods trading session. Now lets put this theory to the test and examine a recent price move. Below in Figure 1.1 the bottom in August, which is marked point "A" is 8936. The high of point "B" is 9649. The price move was 713 points. A .618% pullback equated to 440 points which we subtract from 9649 we get a target level of support of 9209 at point "C". The actual low was 9195 off by 14 ticks. Now to predict the extent of a price advance and upside price objective by using the Fibonacci extension method a 100% move added to point "C" would give us an objective of 9908. On 11/7/03 the actual high was 9915 again off by just a shade.

Applying Pivot Point Analysis gave us a general area of resistance targets above the 9900 level, which corroborated with the Fibonacci extension number of 9908. Taking the Month of October's data the high 9845, the low 9258, and the close 9763 we determine that the projected area of R-1 resistance to be for November would be 9986.

Looking at the prior weeks data which ended on 10/31/03 the high was 9815, the low was 9553 and the close was 9763 we calculated the weekly resistance R-1 number of 9867 and the R-2 of 9972. So we now had a series of resistance numbers to give us a target to use as a level to sell against. As it worked out the market did sell-off to a low of 9578 by 11/21/03.

Combining Pivot Point numbers with the Fibonacci analysis we have a much better outlook and confirmation of Support and Resistance targets. The more calculations collaborate with each other the stronger the potential exists for a strong support or resistance area. Fibonacci numbers at times are better than the pivot points and more times than not the pivot point numbers are slightly more accurate than the Fibonacci correction and extension prices. So when we combine the two techniques and you will get solid target numbers that you can trade from with a higher degree of confidence.

As a short term trader, a swing or longer term trader by using the Fibonacci price Corrections and Extension methods combined with the Pivot Point Analysis you will be armed with very powerful target numbers.

If you are interested in learning more on this subject matter I have a free 18-page booklet on this fantastic method of trading. Go to www.nationalfutures.com and click on the "Articles by John" tab. You will also have free access to the many recordings of my guests such as Larry Pesavento, John Murphy, Robert Prechter, Linda Bradford Raschke, Joe Dinapoli, and others.

In addition, I am conducting a seminar regarding the topic of Technical Analysis using Candlestick pattern recognition Fibonacci and Pivot Point Techniques, which will be held at the Chicago Board of Trade on Friday, December 12. Attendees will have access to the visitors gallery.

Then on Saturday, December 13 we will continue the class at the Conference Center at the Sears Tower. Speakers include Master Fibonacci expert Larry Pesavento, Lan Turner President of Gecko software, Colm Cronin trade system developer, James Cagnina online platform expert.

If you are interested in attending or would like more information on this special seminar, go to www.nationalfutures.com and click on Events and Seminars to find out more details.

Good luck in your trading and I sincerely hope this article gives you insight to explore these techniques.

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About John Person
John L. Person is a 22-year veteran trader a Commodity- Trading Advisor, and a broker for one of the countries leading Futures Firms, Infinity Brokerage Services. Visit www.Infinitybrokerage.com  for a complete introduction of a professional full range brokerage firm.

He is publisher of the weekly "Bottom Line" Financial and Futures newsletter, and also writes the "Daily Dow Report" found at the CBOT website under the Trading Resources section in the Traders Learning Center.

John's name is a familiar one, as he hosts a weekly one hour Radio program, Personal Investors Hour, on Money Watch radio network, on financial AM radio stations.

John's guest list includes the industry's premier trading experts like Linda Bradford-Rashke, Mark Douglas, Victor Niederhoffer, Alan Farley, Martin Pring, John Murphy, John Bollinger, Larry Pesavento, Robert Miner, Larry Williams and others.

Click here to visit John's private website, www.nationalfutures.com to listen to these masterpiece interviews that are archived here and to have access to other important articles.

You may have seen his name as he also appears in many news articles as the world's top journalists, such as Reuters, CBS, Forbes, The New York Times and Dow Jones, rely on his market insights. He has written articles for Futures magazine and has just concluded writing a book on technical analysis, soon to be released. John presents private seminars and appears at the industry's top expos as a guest speaker.

If you trade CBOT Dow futures and are interested in submitting a strategy for publication on the CBOT Web Site please contact us.

The information in this commentary is provided from sources believed to be reliable, but the Chicago Board of Trade does not guarantee its completeness or accuracy. The opinions expressed within the commentary may change without notice. The commentary was prepared for general circulation and does not have regard for the particular circumstances or needs of any specific person who may read it. Neither the information nor any opinion expressed in the Commentary constitutes a solicitation for the purchase or sale of any futures or options contracts.