Pivot Points

Pivot Points use the previous period’s high, low and close which will define future support and resistance. Pivots Points are important levels chartists utilize to decide directional movement, resistance and support. Concerning this, Pivot Points are predictive of leading indicators. There are around five unique versions of Pivot Points. We will concentrate on Standard Pivot Points, Fibonacci Pivot Points and Demark Pivot Points.

Originally Pivot Points were used by floor traders to set key levels. Floor traders are the original day traders. They dealt in a quick moving environment with a short-term goal. At the start of the trading day floor traders would check out the previous day’s high, low and close to figure out a Pivot Point for the current trading day. With this Pivot Point as the foundation, extra calculations were used to fix support 1, support 2, resistance 1 and resistance 2. These fixed levels would be used to help their trading throughout the day.

Time Frames

Pivot Points for 1, 5, 10 and 15 minute charts use the previous day’s high, low and close. For example, Pivot Points for today’s intraday chart may be set entirely on yesterday’s high, low and close. Pivot Points do not change and remain in play throughout the day once they’ve been set.

Pivot Points

Pivot Points for 30 and 60 minute charts utilize the previous week’s high, low and close. These estimates are based on calendar weeks. At the beginning of the week the Pivot Points for 30 and 60 minute charts stay fixed for the whole week. They will change once the week ends and then new Pivots be calculated.

Pivot Points

Pivot Points for every day charts use the previous month’s information. Pivot Points for June 1st would be decided on the high, low and close for the previous month. They stay fixed the whole month of June. Brand new Pivot Points would be calculated on the first trading day of July. Again being based on the high, low and close for June.

Pivot Points

Pivot Points for weekly and monthly charts will use the previous year’s data.

Standard Pivot Points

Standard Pivot Points begin with a base Pivot Point. This is an easy average of the high, low and close. The center Pivot Point is indicated as a solid line between the support and resistance pivots. Remember that the high, low and close are all from the previous period.

 

Pivot Point (P) = (High + Low + Close)/3

Support 1 (S1) = (P x 2) - High

Support 2 (S2) = P  -  (High  -  Low)

Resistance 1 (R1) = (P x 2) - Low

Resistance 2 (R2) = P + (High  -  Low)

The following chart shows the Nasdaq 100 ETF (QQQ) with Standard Pivot points on a 15 minute chart. At the beginning of trading on June 9th, the Pivot Points are in the center, the resistance levels are above and the support levels are below. These levels will remain consistent throughout the day.

Pivot Points

Fibonacci Pivot Points

Fibonacci Pivot Points begin just like Standard Pivot Points. From the base Pivot Point, Fibonacci multiples of the high-low differential are added to form resistance levels and subtracted to form base levels.

 

Pivot Point (P) = (High + Low + Close)/3

Support 1 (S1) = P - {.382 * (High  -  Low)}

Support 2 (S2) = P - {.618 * (High  -  Low)}

Support 3 (S3) = P - {1 * (High  -  Low)}

Resistance 1 (R1) = P + {.382 * (High  -  Low)}

Resistance 2 (R2) = P + {.618 * (High  -  Low)}

Resistance 3 (R3) = P + {1 * (High  -  Low)}

Note the chart below. It shows the Dow Industrials SPDR (DIA) with Fibonacci Pivot Points on a 15 minute chart. R1 and S1 are structured on 38.2%. R2 and S2 are structured on 61.8%. R3 and S3 are based on 100%.

Pivot Points

Demark Pivot Points

Demark Pivot Points begin with a different base and utilize different formulas for support and resistance. These Pivot Points are dependent on the connection between the close and the open.

 

If Close < Open, then X = High + (2 x Low) + Close

If Close > Open, then X = (2 x High) + Low + Close

If Close = Open, then X = High + Low + (2 x Close)

Pivot Point (P) = X/4

Support 1 (S1) = X/2 - High

Resistance 1 (R1) = X/2 - Low

The chart below demonstrates the Russell 2000 ETF (IWM) with Demark Pivot Points on a 15 minute chart. Take note that there is but one resistance (R1) and one support (S1). Demark Pivot Points will not have multiple support or resistance levels.

Pivot Points

Setting the Tone

The Pivot Point determines the normal tone for price action indicated by the middle line of the group that is marked (P). An indication above the Pivot Point is positive and displays strength. But the Pivot Point is based on the prior period’s information. It is put forth in the current period as the first substantial level. A move above the Pivot Point conveys strength with a target to the first resistance. A break above first resistance indicates even more strength with a target to the second resistance level.

Pivot Points

The opposite is true on the downside. A move below the Pivot Point implies weakness with a target to the first support level. A break below the first support level indicates even more weakness with a target to the second support level.

Support and Resistance

Support and resistance levels found on Pivot Points could be applied just like traditional support and resistance levels. The main thing to watch closely is price action when these levels come into play. Should prices fall to support and then firm, traders can look for a successful test and spring off support. It helps to check out a bullish chart pattern or indicator signal to prove an upturn from support. Likewise, should prices increase to resistance and stall, traders can look for a failure at resistance and decline. Chartists should, once again, look for a bearish chart pattern or indicator signal to affirm a downturn from resistance.

Pivot Points

A second support and resistance level may also be utilized to label potentially overbought and oversold situations. A move above the second resistance level would indicate strength, however it would also indicate an overbought situation that may give way to a pullback. Likewise, a move below the second support would indicate weakness, but could also suggest a short-term oversold condition that could give way to a bounce.

Pivot Points

Conclusions

Pivot Points offer chartists an approach to decide price direction and then set support and resistance levels. It normally begins with a cross of the Pivot Point. Occasionally the market starts above or below the Pivot Point. Support and resistance come into play after the crossover. While initially designed for floor traders, the concepts behind Pivot Points can be applied across various time-frames. With all indicators, it is valuable to validate Pivot Point signals with other aspects of technical analysis. A bearish candlestick reversal pattern could confirm a reversal at second resistance. Oversold RSI could confirm oversold conditions at second support. An upturn in MACD could be utilized to confirm a favorable support test. One final note, occasionally the second or third support/resistance levels are not visible on the chart. This is mainly because their levels exceed the price scale on the right. In other words, they are off the chart.

Pivots and SharpCharts

Pivot Points can be seen as an “overlay” on the SharpCharts Workbench. Standard Pivot Points are set as the default setting and the parameters box is empty. Chartists can apply Fibonacci Pivot Points by placing an “F” in the parameters box and Demark Pivot Points by putting a “D” in the box. It is also possible to show all three at the same time.

Pivot Points

Pivot Points