THE PIVOTAL POINT
WHENEVER I have had the patience to wait for the market to arrive at what I call a “Pivotal Point” before I started to trade, I have always made money in my operations.
Because I then commenced my play just at the psychological time at the beginning of a move. I never had a loss to worry about for the simple reason that I acted promptly and started to accumulate my line right at the time my guide told me to do so. All I had to do thereafter was just sit tight and let the market run its course, knowing if I did so, the action of the market itself would give me in due time the signal to take my profits. And whenever I had the nerve and the patience to wait for the signal, it invariably did just that.
It has always been my experience that I never benefited much from a move if I did not get in at somewhere near the beginning of that move. And the reason is that I missed the backlog of profit which is very necessary to provide the courage and patience to sit through a move until the end comes—and to stay through any minor reactions or rallies which were bound to occur from time to time before the movement had completed its course.
Just as markets in time will give you a positive tip when to get in—if you have patience to wait— they will just as surely give you a tip-off when to get out. “Rome was not built in a day,” and no real movement of importance ends in one day or in one week. It takes time for it to run its logical course. It is significant that a large part of a market movement occurs in the last forty-eight hours of a play, and that is the most important time to be in it.
For example: Take a stock which has been in a Downward Trend for quite some time and reaches a low point of 40. Then it has a quick rally in a few days to 45, then it backs and fills for a week in a range of a few points, and then it starts to extend its rally until it reaches 49.50. The market becomes dull and inactive for a few days. Then one day it becomes active again and goes down 3 or 4 points, and keeps on going down until it reaches a price near its Pivotal Point of 40. Right here is the time the market should be watched carefully, because if the stock is really going to resume its Downward Trend in earnest it should sell below its Pivotal Point of 40 by three points or more before it has another rally of importance. If it fails to pierce 40 it is an indication to buy as soon as it rallies 3 points from the low price made on that reaction. If the 40 point has been pierced but not by the proper extent of 3 points, then it should be bought as soon as it advances to 43.
If either one of these two things happen, you will find, in the majority of cases, that it marks the beginning of a new trend, and if the trend is going to be confirmed in a positive manner, it will continue to advance and reach a price over the Pivotal point of 49.50—by 3 points or more.
I do not use the words “bullish” or “bearish in defining trends of the market, because I think so many people, when they hear the words “bullish or “bearish” spoken of marketwise immediately think that is the course the market is going to take for a very long time.
Well-defined trends of that kind do not occur very often—only once in about four or five years— but during that time there are many well-defined trends which last for a comparatively short time. I consequently use the words “Upward Trend” and “Downward Trend,” because they fully express what is going on at that specific time. Moreover, if you make a purchase because you think the market is going into an Upward Trend, and then a few weeks later come to the conclusion the market is heading into a Downward Trend, you will find it much easier to accept the reversal in trend than if you had a confirmed opinion that the market was definitely in a “bullish” or “bearish” stage.
The Livermore Method of recording prices in conjunction with the time element is the result of over thirty years of study of principles which would serve me in forming a basic guide for the next important movement.
After making my first record, I found it did not help me to any great extent. Weeks later I had a new thought which aroused me to fresh endeavors, only to find out that, while it was an improvement over the first one, it still did not give me the desired information. Successively new thoughts would come to mind, and I would make a set of new records. Gradually, after making many of these, I began to develop ideas I did not have before, and each succeeding record I made began to shape itself into better form. But from the time I started to merge the time element with price movements, my records began to talk to me! Each record thereafter I put together in a different way, and these eventually enabled me to ascertain Pivotal Points and in turn demonstrate how to use them profitably marketwise. I have changed my calculations since then a number of times, but these records today are set up in such a way that they can talk to you also— if you but let them.
When a speculator can determine the Pivotal Point of a stock and interpret the action at that point, he may make a commitment with the positive assurance of being right from the start. Many years ago I began profiting from the simplest type of Pivotal Point trades. Frequently I had observed that when a stock sold at 50. 100. 200 and even 300, a fast and straight movement almost invariably occurred after such points were passed.
My first attempt to profit on these Pivotal Points was in the old Anaconda stock. The instant it sold at 100, I placed an order to buy 4,000 shares. The order was not completed until the stock crossed 105 a few minutes later. That day it sold up about ten points more and the next day had another remarkable bulge. With only a few normal reactions of seven or eight points the advance continued to well over 150 in a short period of time. At no time was the Pivotal Point of 100 in danger.
From then on I rarely missed a big play where there was a Pivotal Point on which to work. When Anaconda sold at 200, I repeated my successful play and did the same thing again when it sold at 300. But on that occasion it did not carry through to the proper extent. It sold only to 302.75. Plainly it was flashing the danger signal. So I sold out my 8,000 shares, being fortunate enough to receive 300 a share for 5,000 shares and 299 for 1,500 shares. The 6,500 shares were sold in less than two minutes. But it took twenty-five minutes more to sell the remaining 1,500 shares in 100 and 200 lots down to 298.75. where the stock closed. I felt confident that if the stock broke below 300, it would have a swift downward movement. Next morning there was excitement. Anaconda was way down in London, opened in New York substantially lower, and within a few days was selling at 225.
Bear in mind when using Pivotal Points in anticipating market movements, that if the stock does not perform as it should, after crossing the Pivotal Point, this is a danger signal which must be heeded. As shown in the above incident, the action of Anaconda, after crossing 100, entirely different than its action above 100 and 200, respectively. On those occasions there was a very fast advance of at least 10 to 15 points right after the Pivotal Point had been crossed. But this time, instead of the stock being hard to buy, the market was being supplied with quantities of it to such an extent, the stock simply could not continue its advance. Therefore the action of the stock right above 300 clearly showed it had become a dangerous stock to own. It clearly showed that what usually happens when a stock crosses its Pivotal Point was not going to be the case this time.
On another occasion I recall waiting three weeks before starting to buy Bethlehem Steel. On April 7, 1915, it had reached its highest Price on record: 87.75. Having observed that stocks passing a Pivotal Point gained rapidly, and being confident that Bethlehem Steel would go through 100, on April 8 placed my first order to buy and accumulated my line from 99 up to 99.75. The same day the stock sold up to a high of 117. It never halted in its upward flight except for minor reactions until April 13, or five days later, when it sold at a high of 155, a breath-taking rise. This again illustrates the rewards which go to the person who has the patience to wait for and take advantage of the Pivotal Points.
But I was not through with Bethlehem. I repeated the operation at the 200 point, at the 300 point, and again at the dizzy Peak of 400. Nor had I finished, for I had anticipated what would happen in a bear market, when the stock broke the Pivotal Points on the way down. I learned the main thing was to watch the follow-through. I found it was an easy matter to turn around and get out of a position, when vitality was kicking after a stock crossed the line.
Incidentally, every time I lost patience and failed to await the Pivotal Points and fiddled around for some easy profits in the meantime, I would lose money.
Since those days there have been various split- ups in shares of high-priced stocks and, accordingly, opportunities such as those I have just reviewed do not occur so often. Nevertheless, there are other ways by which one can determine Pivotal Points. For instance, let us say that a new stock has been listed in the last two or three years and its high was 20, or any other figure, and that such a price was made two or three years ago. If something favorable happens in connection with the company, and the stock starts upward, usually it is a safe play to buy the minute it touches a brand-new high.
A stock may be brought out at 50, 60 or 70 a share, sell off 20 points or so, and then hold between the high and low for a year or two. Then if it ever sells below the previous low, that stock is likely to be in for a tremendous drop. Why? Because something must have gone wrong with the affairs of the company.
By keeping stock price records and taking into consideration the time element, you will be able to find many Pivotal Points on which to make a commitment for a fast movement. But to educate yourself to trade on these points requires patience. You must devote time to the study of records, made and entered in the record-book only by yourself, and in making notes at which prices the Pivotal Points will be reached.
Fascinating almost beyond belief, the study of Pivotal Points is, you will find, a golden field for personal research. You will derive from successful trades based on your own judgment a singular pleasure and satisfaction. You will discover that profits made in this way are immensely more gratifying than any which could possibly come from the tips or guidance of someone else. If you make your own discovery, trade your own way, exercise patience, watch for the danger signals, you will develop a proper trend of thinking. In the last chapters of this book I explain in detail my own method of determining the more complex Pivotal Points in conjunction with the Livermore Market Method.
Few people ever make money by trading on the occasional tips or recommendations of others. Many beg for information and then don’t know how to use it. At a dinner party one night a lady kept pestering me beyond endurance for some market advice. In one of those weak moments I told her to buy some Cerro de Pasco which that day had crossed a Pivotal Point. From the next morning’s opening the stock advanced 15 points during the next week with only trifling reactions. Then the action of the stock gave forth a danger signal. I recalled the lady’s inquiry and hastened to have Mrs. Livermore telephone her to sell. Fancy my surprise to learn that she had not yet bought the stock as she first wanted to see whether my information was correct. So wags the world of market tips.
Commodities frequently offer attractive Pivotal Points. Cocoa is traded in on the New York Cocoa Exchange. During most years the movements in this commodity do not offer many speculative inducements. Nevertheless, in making speculation a business, one automatically keeps an eye on all markets for the big opportunities.
During the year 1931 the high price of the December option in Cocoa was made in February at 6.23, the low was made in October at 1.28. In 1935 the high price was made in February at 5.74, the low in June at 4.54. The low price in 19:36 made in March at 5.13. But in August of that year for some reason the Cocoa market became a very different market. Great activity developed. When Cocoa sold that month at a price of 6.88. it was far beyond the highest price of the previous two years and above its last two Pivotal Points.
In September it sold at a high of 7.51; in October the high was 8.70; in November it was 10.80; in December 11.10; and in January 1937 it made an extreme high of 12.86, having recorded a rise of 600 points in a period of five months with only a few minor normal reactions.
Obviously there was a very good reason for this rapid rise, as only normal movements occur year in and year out. The reason was a severe shortage in the supply of Cocoa. Those closely watching Pivotal Points found a splendid opportunity in the Cocoa market.
It is when you set down prices in your record book and observe the patterns that the prices begin to talk to you. All of a sudden you realize that the picture you are making is acquiring a certain form. It is striving to make clear a situation that is building up. It suggests that you go back over your records and see what the last movement of importance was under a similar- set of conditions. It is telling you that by careful analysis and good judgment you will be able to form an opinion. The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements.
I want to emphasize the fact that I do not consider these records perfection, except as they serve me. I do know a basis is there for anticipating future movements and if anyone will study these records, keeping them themselves, they cannot fail to profit by it in their operations.
It would not surprise me if the persons who in the future follow my methods of keeping these records get even more out of them than I have. This statement is based on the premise that, whereas I arrived at my conclusions some time ago, as a result of my record analysis, those beginning to apply this method may very readily discover new points of value that I have missed. I would further clarify this by stating that I have not looked for any further points, because, applying it as I have for some time past, it has entirely served my personal purpose. Someone else, however, may develop from this basic method new ideas which, when applied, will enhance the value of my basic method for their purpose.
If they are able to do so, you may rest assured that I will not be jealous of their success!
Part of “How to Trade in Stocks” by Jesse Livermore.