Terminology, Trading

Pocket Pivots and Buyable Gap-Ups

This post covers two buy techniques from Chris Kacher and Gil Morales. They have presented this technique at multiple places, a sample copy of their presentation can be found here.

There is a lot more information on the two techniques at their website (http://www.virtueofselfishinvesting.com/), especially at the FAQ section.

Pocket Pivots

Idea and Characteristic

  • Institutions buy within consolidations and during uptrends, they don’t buy breakouts because it is too obvious to everyone. The idea is to look for the footprints of these institutional buying.
  • Where to look
    • Within or coming out of constructive basing patterns (i.e. basing patterns that signal an uptrend).
  • Characteristic
    • Day’s volume is larger than the highest down volume day over the prior 10 days. You may have a higher up volume day and that’s fine.
    • If this coincides with base breakouts or gap-ups, even better.

Target Stocks

  • Strong fundamentals, i.e. earnings, sales, pretax margins, ROE, leader in its space, compelling theme, etc.

Situations to Avoid

  • If the pivot is not near its 10-day SMA, it is extended and should be avoided. Wait for the 10-day SMA to catch up to the stock.
  • If the stock is in a multi-month downtrend (>=5 months), wait for the rounding part of the base to form.
  • If the stock is below the 50-day SMA or 200-day SMA, avoid. Only exception is if it is getting support near the 200-day SMA with a constructive base.
  • If the stock sells off hard down through the 10-day SMA or 50-day SMA, then shoots straight back up in a ‘V’ formation, avoid. These are failure-prone. You mainly want to look for stocks going side-ways.
  • Avoid pivots that occur after wedging rallies (i.e. stock inches up day by day without significant volume or with declining volume).

Bottom Fishing

  • If you want to bottom-fish, i.e. the stock would be below both its 50-day SMA and 200-day SMA, make sure that the stock has already made a “rounded base” and just starting to go higher.

When to Sell

  • A pocket pivot buy point which results in an uptrend that is shown to obey the 10-day SMA for at least 7 weeks following the initial pocket pivot should be sold upon its initial “violation” of the 10-day SMA. If the stock does not respect the 10-day SMA, use the 50-day SMA instead.
  • If the stock has been obeying the 10-day SMA prior to the pocket pivot, you can start counting the 7 weeks from the time prior to the pocket pivot.
  • If within 7 weeks after the initial pocket pivot, the stock violated the 10-day SMA, switch to using the 50-day SMA as the sell guide.
  • A “violation” is defined as a close below the 10-day/50-day SMA, followed by a move on the next day below the intraday low of the first day (i.e. the previous day, the first day is the day when the stock closed below the 10-day/50-day SMA).

Buyable Gap-Ups

Target Stocks

  • Strong fundamentals, i.e. earnings, sales, pretax margins, ROE, leader in its space, compelling theme, etc.


  • At least 0.75 times the stock’s 40-day Average True Range of the day before the gap-up day.
  • Occur on volume at least 1.5 times or 150% above the 50-day moving average of daily trading volume.
  • Occur within an uptrend or constructive consolidation, not during a downtrend

Risk Management

  • A buyable gap-up should hold above the intra-day low of the gap-up day. A stop should be placed slightly below that, e.g. 2% below.
  • A buyable gap-up that closes near the lows of the gap-up day is a warning sign.
  • If you buy the stock on the gap-up day, you can buy a half position first at the open, and if the gap-up closes near the lows you can halve that position (to a quarter position).

Potential Place to Add to Position

  • When the stock pulls back to the 10-day SMA, but is still above the intra-day low of the gap-up day, watch for a rebound off the 10-day SMA support as a potential place to add to your position.

Situations to Avoid

  • Same as for pocket pivots.



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