Hang Seng Index

Hong Kong stock market improved over the week. The Hang Seng index dropped below its 200 day moving average in early February but managed to close slightly above it for the last trading session of February.

The technical charts are showing a mixed picture.

The MACD signal is above its indicator line which is a bullish sign. However, the RSI is approaching overbought levels. In a bullish environment, market may stay in overbought territory for some time before falling back. But this time, the ADX is not indicating a bullish trend and –DI is still above +DI. Hence, at best we are seeing a slow down in the down swing.

The market is most likely going to move sideways with the 100 day moving average serving as resistance and 200 day moving average acting as support level.

A break below the 200 day moving average will be a negative sign and if that level is taken out, the next support will be at 19400 level which is near the low set in 8 Feb 10.

Pivot Points

Pivot Points

A trader needs reference point to enter a trade, place stop loss level and profit taking level. There are a number of ways to derive such reference points. One method is to draw trend lines on charts to determine support and resistance level. Fibonacci theory is also another favourite way to check for potential support and resistance points. A more mathematical method is through pivot points.

Pivot points are calculated based on the following formulas:

Pivot point for current bar = [high(previous)+low(previous)+close(previous)]/3

From the pivot point, you can derive 3 support and 3 resistance levels

Resistance 1 = (2*pivot point) – low(previous period)

Support 1 = (2*pivot point) – high(previous period)

Resistance 2 = (pivot point – support 1) + resistance 1

Support 2 = pivot point – (resistance 1 – support 1)

Resistance 3 = (pivot point – support 2) + resistance 2

Support 3 = pivot point – (resistance 2 – support 2)

Taking Dow Industrial Average as an example, the following statistics can be derived:

What we can see from the statistics is that price bar exceeds the R2 resistance around 13% of the time. How can a trader make use of this information? A trader that is holding a short position can choose to place the stop loss level at somewhere above the R2 level for a 13% probability that the stop loss is triggered. Such statistics can be valuable to a trader who needs to decide where to exit an opened position.