The Hidden-Pivot Method

An overview for seminar students

The method I use to forecast swing points and trends is the most accurate and powerful
I’ve discovered in 30 years of trading. It is also by far the simplest, requiring little more
than junior high school math to do the necessary calculations. I first learned about this
amazingly precise method of analysis from a floor trader on the Pacific Stock Exchange
named Ira Tunik. At the time, Ira was using the cycles work of J.M. Hurst, a pioneer in
the field of technical analysis, to make a very good living on the options floor. When he
retired as a pit trader in the late 1980s, he shifted his nest egg mostly into bonds, which at
the time were providing annualized returns approaching 10 percent. However, when
interest rates began to decline from those cyclical peaks, Ira realized he would need a
foolproof trading strategy to live well off his savings without having to dip into principal.

Over the next year-and-a-half, Ira delved exhaustively into the world of trading systems,
reading every book he could find on Elliott Wave Theory, Gann Angles, Pyrapoint,
Fibonaccis, oscillators, stochastics -- even astrology. The system he finally settled on was
called Lindsay’s Trident. But for reasons explained below, it took us both several more
years and many modifications to tweak the system into its present, very powerful form.
For starters, we discarded the core principle of Charles Lindsay’s trend-following
system, substituting some stunningly effective corollaries that Lindsay himself evidently
had failed to recognize. The result was a rules-based system that, combined with a little
street-sense, can outperform some of the most powerful black box systems ever devised.

Stocks Breathe

At the heart of the system is a simple observation -- that stocks breathe in and out, and
that for every zig in a chart there is a zag somewhere else that corresponds to it exactly.
Think of it as a flux of yin and yang energy seeking equilibrium at all times. Once you
are able to identify the complementary zigs and zags, it becomes possible not only to
discern the fundamental rhythms of the market, but to use this knowledge to predict price
swings with uncanny accuracy. This means, for one, that stop-losses of a point or less can
be used to trade the Mini-S&P futures. Also, counter-trend entries are possible in the
opening minutes of the day, when even the pros are typically on the sidelines waiting for
the dust to settle.

This allows us to initiate trades at “uninteresting” prices where relatively few predators
will be ready to pounce. The result is that we can gain a statistically significant edge on
the most tedious, range-bound days. Everyone who has traded index futures has
experienced such days: the market establishes a range in the first 30-90 minutes, then
spends the rest of the day making fools of those who would attempt to second-guess, or
“pick,” that range.
But what if you could initiate trades before a range had even been established – and at a
price which to most other chartists would look like the middle of nowhere, so to speak?
That is exactly what the Hidden Pivot System allows you to do, enabling you to exit the
market with a fat profit before the competition has had a second cup of coffee.

The beauty of the system is that you don’t have to be a math whiz to master it. My
Hidden Pivot rules are more visual than mathematical, and they can be applied to potent
effect by anyone with the patience and diligence to monitor weekly, daily and intraday
charts over time. Speaking as a “permabear,” I should mention that the system has been
particularly useful to me, since it allows me to override my innate bearishness with
mechanical objectivity. I am a bear’s bear by inclination. Armed with this system,
however, I am perfectly comfortable being a raging bull when the signs are right. (Note:
You’ll receive a Hidden Pivot calucaltor with your course materials.)

How It Works

How does the system work? To start with, I always try to visualize the price movement of
stocks, commodities, options and indexes in the perspective of an ABCD pattern such as
the one shown above. Unlike Elliott Wave Theory, which is rooted in trend patterns with
five legs and corrections with three, my method distills all of the action down to three
legs. It also sidesteps the often daunting task of distinguishing corrections from trend
moves. Those who are familiar with Elliott Wave Theory know that even EWT experts
sometimes bog down in the choppy seas of corrective patterns. Terms such as expanded
flats, extended or truncated fifths, double and triple threes, zigzags, and contracting,
ascending and descending triangles are all part of Elliott Wave terminology, and they
must all be mastered by the chartist who would attempt to forecast accurately and
profitably. However, Hidden Pivot strategies, on the other hand, shun such complexities,
focusing instead on the most fundamental rhythms of the market. If you can distinguish
good art from bad, you can learn the Hidden Pivot Method.

So how do I keep from getting fooled or confused by corrective patterns? Simply by

treating them, not as corrections, but as ABCD patterns unto themselves. Remember, I
said that all price action can be reckoned in ABCD terms. This means that the B-C leg of
the pattern above can itself be divided into an abcd structure, as follows:
The subdivision yields no crucial information per se, but if one applies a simple test to
the abcd pattern, specifically to its c-d leg, he will be rewarded with a cornucopia of
tradable information. For example, if the midpoint of the c-d leg is hit precisely and a
rally ensues, you can be confident the rally will reach the ‘D’ target of the larger pattern
just as precisely. This rule, as well as many others that are equally useful, are discussed
regularly in my newsletter, Rick’s Picks, with charts to illustrate.

Trident’s Inventor

Ironically, the originator of the system never completely understood how powerful it was.
The Trident System was developed in the early 1970s by a man named Charles Lindsay,
who marketed it in seminar form with Larry Williams, commodity trader extraordinaire.
The seminar had an unusual marketing gimmick: Students could pay the hefty tuition fee
out of trading profits. No profits, no fee. Trident is still available in book form from
Windsor Publishing, but its rudiments can be encompassed in a single chart:
The crux of Lindsay’s method was to wait for an AB impulse leg to form; then, after a B-
C pullback into a rule-based “window,” the trader would initiate a position exactly 25%
(point ‘X’) along a follow-through leg that one presumed would eventually equal AB in
points. After entering, the trader would to place a stop-loss just below point ‘C’.

An Obvious Weakness

One obvious weakness of this system is that it limits itself to just a single entry point
along the entire length and breadth of the ABCD pattern. In the chart above, assuming it
is of daily-bar magnitude, that could mean two or three week of waiting for one good
entry opportunity. Another problem is that point ‘X’ is intuitively too obvious – a grazing
spot where you and just about every other trader will instinctually be waiting to get long.
Think about it. If you were looking to trade a stock and it suddenly shot up, producing a
nice, robust AB impulse leg like the one in the illustration above, you would probably be
thinking, “Geez, that was one heckuva rally I missed.” Still game to trade, you’d hope for
a pullback – one that presumably would provide a comfortable spot to enter. Of course,
you’d be nervous about buying the stock while it was still falling, so you’d look for a sign
that the correction had ended. What better sign than a nascent uptrend? Typically, the
comfort zone for buying this rally belatedly would occur somewhere around point X. Am
I right? If you’ve ever traded stocks or commodities, you can understand why, in the
midst of the picture-perfect rally described by the chart, jumping aboard at or near point
X would feel entirely natural.
Then, as we know all too well, XYZ shares will fall just far enough to stop the herd out
somewhere below point C. The stock will then turn sharply higher, and it’ll be “off to the
races!” So how do we take advantage of this lovely pattern without getting burned?
Recall what I said earlier, that Ira and I discarded Lindsay’s core principal, focusing on
its far more useful corollaries. Specifically, we tossed out the notion that only point X
works as an entry spot. By watching this pattern play out many thousands of times on the
one-, five-, and fifteen-minute bar charts, we were able to determine more than a dozen
additional entry points, both long and short, along the path of ABCD.

In the chart below, this implies you would get long at A; short at B; long at C; even
longer at X; take partial profits at P; and exit at D -- or even reverse the position by
shorting at D.

The system would be a winner if it merely yielded the microscopically accurate swing
points that it does. But in fact it can do much more. An especially powerful feature of the
system is that it can determine at all times which trend is dominant – up or down. By
observing price action at the midpoint of follow-through legs (i.e., along ‘cd’), one can
predict with confidence, precision and consistency the continuation of trends, or,
alternatively, their termination.

Hidden Pivots and Risk Control

Veteran traders are wont to say that “the trend is your friend,” insisting that no system
which trades against the trend, as this one appears to do, can make money consistently. I
like to reply simply that we are not trading against the trend; rather, we are initiating
positions at the very first tick of new trends. Indeed, the system is so accurate that bids
must often be placed a tick above or below tradable swing points, since buying or
shorting at the actual pivot risks missing the trade because of liquidity problems.

I usually refer to these swing points as “hidden pivots” because they are not on the radar
screens of conventional chartists. In practice, I do not usually initiate trades at hidden
pivots that are coincident with support and resistance lines, trendlines, Fibonaccis and
other price points that are widely observed and likely to be well anticipated. It’s always a
thrill to catch a ride at a reversal point that has obviously caught the crowd unawares.
And what better way to start the day than with a profitable trade executed amidst what
most traders would describe as opening-hour chaos? This system not only makes it
possible to do so, it also allows rigorous control of risk to a degree that is all but
impossible to achieve with other methods.

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