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The Ever Confusing Emini S&P Pivot Point Support Resistance Levels

By Lawrence  

Pivot Point in day trading refers to the average of the previous session’s high, low and close. A set of other price levels are derived from the pivot point as quick reference to the nearest support and resistance price levels. The reason for using such rudimentary method to figure out these price levels is that in the old days there was not enough computation power at the hands of the floor traders. Hence they need a few handy price levels pre-calculated so that they can remember them before the trading day starts.

Ever since the popularization of the pivot point price levels, they became self fulfilling prophecy as majority of the traders all pay attention to the same price levels, actions are more often than not happening around those price levels. As the importance of these price levels are becoming obvious, even more traders learned to pay attention to them. This feedback loop helped the pivot point price levels becoming the necessary trading tools everywhere.

Calculation of the Pivot Point and Its Support Resistance Price Levels

The formulas for the Pivot Point and its related set of support resistance are as follows.

Pivot Point (PP) = (Previous High + Previous Low + Previous Close) / 3

Near Resistance (R1) = PP x 2 – Previous Low

Near Support (S1) = PP x 2 – Previous High

Outer Resistance (R2) = PP + (Previous High – Previous Low)

Outer Support (S2) = PP – (Previous High – Previous Low)

There are also various extended support / resistance levels invented by traders to deal with extreme price movements that move outside of the range defined by the outer support and outer resistance.

A Slight Complication for Emini S&P Pivot Points

For US stocks that trade only between 9:30 am to 4:00 pm Eastern Time, it is very simple to calculate its pivot point and the support resistance levels. You just need to find the day high, day low and the closing price from the trading session to put into the formulas above. It is a straight forward exercise.

For Emini S&P, however, it is not that simple to figure out the day high, day low and close. The reason is that Emini S&P pretty much trading 23 hours a day. It starts trading on Sunday at 6:00 pm Eastern Time. The trading day concludes by Monday 5:15 pm with a 15 minutes halt from 4:15 pm to 4:30 pm. Then trading resumes by Monday 6:00 pm and the cycle repeats until the trading week is concluded on Friday.

This complex schedule of trading creates a big issue for data vendors and trading platforms. Namely, the day high, day low and closing price are somehow recognized in different ways depending on where you get your data from and also how your trading platform chooses to calculate the pivot points. This mess does not affect the professional traders much (I will explain later) but definitely mess up the minds of countless number of beginner traders.

The most reasonable day high and day low values should be the high and low prints from previous day 6 pm to current day 5:15 pm because that is how one session is defined. And the closing value should the the final print at 5:15 pm.

But I have seen quite a number of brokerage and data vendor whose data are taking the high and low prints from the whole current day activities, meaning that it covers part of current session and part of next session. It is just wrong.

Then, there is also the old school 9:30 am to 4:15 pm regular trading session coming from the pit trading days. Pros like to stick with this time range to look for the day high, day low and closing price. This version works well over the years hence big players stick to this version all the time.

But nowadays, there are many S&P 500 derivatives trading within the US stock market trading hours. For example, the S&P500 ETF SPY is one of the most active stocks traded in the stock market. This means the importance of the index future 4:15 pm close is getting weaker.

In fact, 9:30 am to 4:00 pm stock market operating hours is a logical choice for locating the day high, day low and close. After all, the underlying components of S&P 500 are trading actively during this time range.

Visualize the Problem

Following chart shows you the time coverage of the four common variations of session definition for the purpose of identifying day high, day low and close.

The time range in cyan (top bar) is the official 23 hours trading session.

The time range in green (2nd bar from top) is the US stock market open hours.

The time range in pale green (3rd bar from top) is the classic S&P index future regular trading session.

The time range in red (bottom bar) is what some data vendors do when they gather the day high, day low and day close information.

image

And the resulting pivot and related price levels are so different from one version to another that they are more confusing than helping.

image

The One That Is Most Important

From my testing and statistics collected, the most meaningful set of pivot points is the one that track Emini S&P from 9:30 am to 4:00 pm Eastern Time.

The second place winner with strong statistical significance is the one that goes from 9:30 am to 4:15 pm Eastern Time. Again, it is mainly the range established by the active stock market hours with the original index future settlement time.

The third place goes to the 23 hours session as defined by the exchange. The problem though is that overnight events can expand the range of the trading session so much the pivot point and the support resistance price levels will be too far away from each other for meaningful usage.

The remaining one and probably more variations of bad data collection thanks to people’s misunderstanding of the trading sessions should be ignored because they do not provide any useful statistical information to us.

Summary

Pivot point and its related support resistance price levels are supposed to be a quick and dirty method to get the traders a handle of the market. But sometimes things just do not work the way we think they should. In other words, it is best we calculate our own pivot point and its related price levels so that we can ensure the consistency with the price levels we intended to use.

The quirky issue of having so many versions of pivot points will continue to haunt both experienced and beginner traders who trade the Emini S&P and its cousins like Emini Nasdaq.

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Comments
  • smilingsynic  July 20, 2015 at 20:36:31

    Still working on those articles, Lawrence.

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