The short version
Gil Morales and Chris Kacher learned to trade growth stocks at William O'Neil's firm, then looked for ways to buy leaders earlier and with less risk than a classic breakout. Their answer was the pocket pivot: a day of heavy buying inside or near a stock's base, before it breaks out. They also trade buyable gap-ups, strong gaps on news in leading stocks.
Who they are
Morales was a portfolio manager and chief market strategist at William O'Neil + Co.; Kacher was a research analyst and portfolio manager there. After leaving, they wrote about their methods together: Trade Like an O'Neil Disciple (2010) and In the Trading Cockpit with the O'Neil Disciples (2012). Morales also co-wrote How to Make Money Selling Stocks Short (2004) with O'Neil himself. In their book, the pocket pivot is credited to Kacher's research.
The pocket pivot
A classic O'Neil breakout is bought when the stock clears the top of its base, often after it has already jumped. Morales and Kacher noticed that large buyers often show their hand earlier, inside the base: a single up day whose volume beats every down day of the previous ten sessions.
- The stock is in an uptrend, above its 50-day moving average
- Today is an up day
- Today's volume is higher than the volume of any down day in the previous 10 sessions
- The stock isn't extended: it is near its 10-day or 50-day moving average, not far above it
Because the entry comes earlier and closer to support, the stop can be tighter than on a breakout bought at the top of the base.
Buyable gap-ups
Their second setup is a gap up in a leading stock on big news, usually earnings, with heavy volume. Rather than wait for the stock to come back, they buy during the gap day and put the stop under that day's low. It is the same idea Stockbee calls an episodic pivot.
Two kinds of pocket pivot
- Base pocket pivot. Inside or at the right side of a base, before the breakout. The earliest entry, bought while the stock is still quiet.
- Continuation pocket pivot. After the breakout, in a stock already trending up, usually as it bounces off its 10-day moving average. A second chance to buy a leader, or to add to one that is working.
Pocket pivot or breakout?
| Classic breakout | Pocket pivot | |
|---|---|---|
| Where you buy | As price clears the top of the base | Inside the base, or off the 10-day line in an uptrend |
| The volume test | Well above the stock's average | Above every down day's volume in the last 10 sessions |
| How far from support | Often several percent above it | Close to the 10-day or 50-day average |
| The stop | Under the breakout point | Under the nearby average, usually tighter |
The two aren't rivals. A stock can show a pocket pivot inside its base and then break out a week later, and many traders buy part of a position on each.
When a pocket pivot isn't one
The volume rule alone flags plenty of days that aren't worth buying. Morales and Kacher add context:
- The stock must be in an uptrend, above its 50-day average. A heavy up day in a falling stock is usually short covering.
- It must not be extended. A stock far above its 10-day line has already moved; a pocket pivot there carries a wide stop.
- The pattern must be sound. A stock rocketing straight up off a deep low, with no base at all, is a poor candidate however heavy the volume.
- The market matters. In a falling market most pocket pivots fail, as most breakouts do.
Selling: the seven-week rule
For selling a winner, they describe a rule of thumb. If a stock has held above its 10-day moving average for about seven weeks after it broke out, it has shown that it respects that line, so a decisive break of it is a signal to sell. A stock that hasn't behaved that way gets more room, and the 50-day average becomes the line to watch.
Their books
- Trade Like an O'Neil Disciple (2010): the pocket pivot, buyable gap-ups and their selling rules, with their own trades as examples.
- In the Trading Cockpit with the O'Neil Disciples (2012): the methods applied trade by trade, in more detail.
- Short-Selling with the O'Neil Disciples (2015): the same ideas turned around for selling short.
- How to Make Money Selling Stocks Short (2004): Morales's earlier book, written with William O'Neil.
Using their method here
- Pocket pivots: US stocks in an uptrend whose volume today beat every down day of the last 10 sessions.
- Episodic pivots: gaps on news and heavy volume, close to their buyable gap-ups.
- Near the 50-day: uptrend stocks pulling back toward the line where many pocket pivots start.
- Follow-through day: whether the market has confirmed an uptrend, by O'Neil's rule.
Questions people ask
Who is Gil Morales?
A former portfolio manager and chief market strategist at William O'Neil + Co. With his colleague Chris Kacher, also a former O'Neil portfolio manager, he wrote Trade Like an O'Neil Disciple (2010) and In the Trading Cockpit with the O'Neil Disciples (2012). He also co-wrote How to Make Money Selling Stocks Short with William O'Neil.
What is a pocket pivot?
An up day whose volume is higher than any down day's volume in the previous ten sessions, in a stock that is in an uptrend and not extended above its short-term moving averages. It signals large buyers stepping in, often before the stock breaks out of its base, so it offers an earlier entry with a tighter stop.
What is a buyable gap-up?
Their name for a strong gap up on news and heavy volume in a leading stock, bought during the session, with a stop under the low of the gap day. It is close to what Stockbee calls an episodic pivot.
What is a continuation pocket pivot?
A pocket pivot that comes after a stock has already broken out, usually as it bounces off its 10-day moving average in an uptrend. It gives a second, later place to buy or add to a leader that is already working.
What is the seven-week rule?
Their rule of thumb for selling. If a stock has held above its 10-day moving average for about seven weeks after it broke out, they treat it as a stock that respects that line and sell on a decisive break of it. If not, they give it more room and use the 50-day average instead.