Strategy Description

Pivot Reversal

Basic Concept:

1. The Pivot Reversal is a reversal play off of a support or resistance line.

2. Support and/or resistance is determined using standard Pivot Point formula.
3. The Pivot Point Calculator in Extreme Charts will provide the support/resistance
levels.
4. Appropriate option positions (calls or puts) will be entered to capture potential
profits on a given move in the stock price.

General Description:

Pivot point and related intraday support and resistance levels are calculated based on
standard pivot point formulas. The Morning Lab Extreme Charts Pivot Point Calculator
automatically calculates these levels daily for any stock or index. These levels allow a
trader to consider whether to enter and/or exit an option trade based on a reversal of
the stock at that intraday support/resistance level.

The standard pivot point formulae can be used to build a pivot point calculator in a
spreadsheet, however these formulae will still require the user to enter the previous
day’s high low and close for each stock.

The formulae are:

For Excel Spreadsheet:

H- HIGH, L- LOW, C- CLOSE, PP-PIVOT POINT

PP = (H + L + C) / 3 then

R1 = (2*PP) - L

R2 = PP + (H - L)

R3 = H + 2*(PP -L)

S1 = (2*PP) - H

S2 = PP - (H - L)

S3 = L - 2*(H - PP)
Once the intraday support and resistance levels have been calculated they are plotted
onto the stock charts that will be traded that day. Candidates are selected based on
high average true range to maximize potential intraday movement.

Execution:

As soon as the market opens, the trader will watch for the stock price to move to a
support or resistance level and then watch for reversal signals. These may include
waning volume as the stock approaches the support or resistance level, small bodied
candlesticks as support/resistance is approached and reversal patterns such as
tweezers bottom/top, bullish/bearish engulfing, harami patterns, double bottom/top, etc.

An option position may be taken by buying the appropriate option (call or put) with the
appropriate expiration (typically the front week/month) and the appropriate delta
(typically a mid 60 to 90 delta).

Trade Management:

Care is taken to enter the option position when the stock price is as close to the intraday
support/resistance level as possible. This allows the trader to exit just on the other side
of the support/resistance level if the stock goes against the position, reducing losses in
the trade.

If the stock price moves in favor of the trade, the trader may scale out of the position by
selling half of the position at an acceptable profit. Another half can be sold as the stock
price continues to move in the trader's favor, potentially reducing risk and leverage. The
remaining positions can be sold if the stock price reaches the next intraday
support/resistance level.

Prior to entering the trade, the chart must be evaluated to determine the positioning of
the stop exit. This can be based on recent trading activity above resistance or below
support. If the stock moves against the trade, then the trade should be exited as soon
as the stock price breaks the support or resistance level, especially if the break happens
on increasing volume. Light volume breakouts/breakdowns must be evaluated and
managed carefully. The key to a good stop exit rests on a good entry to the position as
close to support/resistance as possible.