Crunching the Voodoo

I happen to look at what I call "Voodoo" tools : the indicators that seem to work properly while I have absolutely no idea why they do, for which I can't find no other rationale than they're just voodoo : among them are the Fibonacci retracements for instance. The reason is probably such tools are self-fulfilling prophecies fed thanks to plenty of guys who either believe in them or don't believe (or don't understand in my case) but trade them. Actually the reason why they work doesn't matter, what matters is they work : don't think, trade!

Among the voodoo tools I use for short term (daily) analysis are the Pivot points , inherited from the floor traders. From yesterday's low, high and close, a pivot point is defined (the average of the 3) and 3 support (S1,S2 and S3) and 3 resistance (R1, R2 and R3) levels and for a reason only The Lord of Trading knows, I've observed they do act as support-resistance... To illustrate this, the hourly chart of the EURUSD below shows for yesterday and today the pivot points (grey lines), supports (in green, S3 is not showed here) and resistances (in red, R3 not shown). Today (while the day is not over...), the R1 seemed to have stemmed the rise of the pair and then it looks like the fall after the positive ISM figures (positive for the USD) has rebounded at the pivot.

I've done some simple stats on the closing prices of the SPX and the ones (well the prices at 6.00pm london) of the EURUSD and looked how they located between the pivot points. The frequencies are shown in the table below :

Close                                 SPX                 EURUSD
Below S3                             4%                        1%
Between S3 and S2              9%                        6%
Between S2 and S1              9%                      13%
Between S1 and Pivot        20%                       30%
Between Pivot and R1        31%                       28%
Between R1 and R2           14%                       10%
Between R2 and R3           12%                         8%
Above R3                           2%                          2%

The table notably shows that 50% of the time for the SPX and 60% for the EURUSD, the closing price is between S1 and R1 and respectively 73% and 82% between S2 and R2. To be frank, I'm a bit disappointed by the figures as I thought there would be more significant (particularly for the S&P) and expected figures like 90%. As they are, it's not really tradable. Maybe I've not crunched the right stuff and not found the relevant stat yet, to be investigated further, but believe me, that's voodoo!

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FYI As this post is published: SPX 1123 // SX5E 2825 // NKY 9489 // DAX : 6331 // EURUSD 1.3140 // USDJPY 86.24 // XAUUSD : 1194