Pivot Point

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In technical analysis, Pivot Points are used to determine sensitive trading levels at which the price trend is predisposed to change direction - possible support and resistance lines. Pivot Points are trend-predicting indicators (leading indicators) that are based on the average of the previous day's High (H), Low (L) and Close (C) prices. While intraday charts are the most popular timeframe for use with Pivot Points, some technical analysts may prefer to use Pivot Points in longer timeframes where they are based on the average weekly or monthly Open, High and Low Prices.

A common way of representing Pivot Points is by five lines where the center line is the Pivot Point (PP) Line, the two lines above the Pivot Point are the first and second Resistance levels and the two lines below Pivot Point are the first and second Support levels. As was mentioned above, the Pivot Point is calculated as the average price and is based on the previous period High, Low and Close prices. However, some technical analysts may prefer to use only High and Low prices or add the Open price:

PP = (H + L + C) / 3
or
PP = (H + L) / 2
or
PP = (O + H + L + C) / 4

The first Resistance (R1) and Support (S1) are based on the difference between the Pivot Point line and the previous period's High and Low prices and are calculated as

R1 = PP + (PP - L) = 2 x PP - L
and
S1 = PP - (H - PP) = 2 x PP - H

The second Resistance (R2) and Support (S2) lines are based on the width of the trading range (High - Low) and are calculated as

R2 = PP + (H - L)
and
S2 = PP - (H - L)

The formula for the second resistance and support lines is commonly used to determine higher support and resistance levels:

Rn = PP + (n - 1) x (H - L)
and
Sn = PP - (n - 1) x (H - L)
where n is the support/resistance level number.

In technical analysis, Pivot Points are used primarily as predictive indicators of stock/index/market movements. If, at the market open a stock, an index or any other commodity is traded above the Pivot Point, this is generally associated with positive (Bullish) sentiment. Conversely, stock traded below the Pivot Point is associated with Bearish sentiment. Based on this knowledge a trader may adjust his/her trading strategy of using other technical studies to trade only "Buy" signals when the price is above the Pivot Point and trade only "Sell" signals when the price moves below the Pivot Point.

Another approach when using Pivot Points is to trade Support and Resistance levels. Technical analysis states that, at the Pivot Support and Resistance levels, a stock's price is predisposed to change its trend. Since these levels do not signal changes in a price trend and only indicate the weaknesses of the trend, the most common way of using Support and Resistance levels is to use them as a profit target and stop-loss level. For instance, if the stock is traded above the Pivot Point, a trader may decide to open a Long trade with a stop loss a few points below Pivot Point. When the stock price advances above the first Support line, the trader may move the stop-loss a few points below the first Support line, and so on.

Chart 1: S&P 500 chart with Pivot Points
Blue Line - Pivot Point; Green Lines - Resistance Lines, Red Lines - Support Lines

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