Pivot Points

Pivot Points are used to project potential support and resistance levels. The main time periods used are daily, weekly, and monthly pivots. The formula for the daily pivot point, support, and resistance is shown below:

• Pivot Point = [Yesterday's High + Yesterday's Low + Yesterday's Close] / 3 

A 15-minute chart of the mini-Dow futures contract and the corresponding floor trader pivots are shown below:

Support Levels

• S1 = [Pivot Point * 2] - Yesterday's High 
• S2 = Pivot Point - Yesterday's High + Yesterday's Low 
• S3 = S2 - Yesterday's High + Yesterday's Low 

Resistance Levels

• R1 = [Pivot Point * 2] - Yesterday's Low 
• R2 = Pivot Point + Yesterday's High - Yesterday's Low 
• R3 = R2 + Yesterday's High - Yesterday's Low 

To calculate weekly or monthly numbers, simply replace "yesterday's" with "last week's" or "last month's" high or low.

Pivot Point Example 

In the chart above, and going from left to right, Resistance Level 1 (R1) held and the Dow Jones Industrial Average mini-Dow futures contract reversed course and headed downward.

After that, the next potential support was at the Pivot Point. However, the mini-Dow broke through the Pivot Point. Notice that when the mini-Dow attempted to reverse course, it was rejected by the Pivot Point now acting as resistance. An important technical analysis concept is that when resistance is penetrated the prior resistance might then become support. Similarly, when support is penetrated the prior support then might become resistance (see: Support & Resistance).

From there, the next support was Support Level 1 (S1). S1 held strong and the mini-Dow reversed direction yet again.

The next resistance line was at the Pivot Point, which failed.

The trading day ended by the mini-Dow testing the Pivot Point, now acting as support, which subsequently held. From there, the index rallied on into the close.

More ways to use Pivot Points is discussed on the next page.

Pivot Point Trade Examples

In addition to giving possible buy and sell signals, pivot points might give traders a good time to get out of their trade. To illustrate, during a rally some traders will set their sell orders right below the next resistance line. Thus, pivot point resistance and support lines could generate ready made profit targets.

A 5-minute chart of the Nasdaq 100 ETF (QQQQ) is shown next:

In the 5-minute chart of the Nasdaq 100 ETF above, the QQQQ's opened the day downward, but held steady at Support 2 (S2).

From there, the Nasdaq 100 ETF rallied past S1 and the Pivot Point. Eventually, the QQQQ's found resistance at Resistance 1 (R1).

Next, the Pivot Point offered support initially, but then the QQQQ's meandered slightly above and below the pivot point, until finally, the QQQQ's accelerated past R1 and then past R2.

The rally continued until one candlestick reached R3, where the bulls were promptly rejected.

(Source: onlinetradingconcepts.com)