Elliott Wave: Pivot With It
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November 30, 2007
A pivot point is an indictor often used by floor traders or day traders as a quick and easy way to calculate resistance and support levels. In trading, as in life, it’s remarkable how well a basic approach can work.
There are a variety of ways to determine pivot points. In this article I will focus on what is probably the simplest and most popular method of calculation, as shown below.
Mid Pivot Point: | (High + Low + Close) / 3 |
High Pivot Point: | Mid Pivot Point + ((High – Low)/2) |
Low Pivot Point: | Mid Pivot Point - ((High – Low)/2) |
On Chart 1, below, the Monthly Pivots have been calculated for the S&P 500 Futures continuous chart. First, these levels allow Traders to gauge whether the S&P’s current price is comparatively high or low. Second, they give Traders potential resistance and support levels. It is important to remember, however, that pivot point levels are a gauge and not a literal reading of market activity.
A quick look at the chart tells us that the Monthly range for the S&P in November 2007 has been significantly greater than the October range. This can be established by the fact that current prices are well outside last period’s high to low range.
Chart 1 – S&P 500 Pivot Points
click here for more detail
In the Quarterly pivot points shown in Chart 2, there are clear examples of price action slowing or reversing around major pivot point levels.
Chart 2 – S&P 500 Resistance/Support
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When price action moves outside the pivot levels, you can move your pivots back into play by extending the high to low range by 50% or 100% increments. In Chart 3 September’s monthly pivot levels have been extended by moving 100% above the pivot high and 100% below the pivot low. While some Traders prefer Fibonacci percentages, 50% and 100% levels work well and keep you from drawing too many lines on your charts.
Chart 3 – S&P 500 Extended Pivot Levels
click here for more detail
In the case of the current yearly high, the value in extending pivot levels once prices move beyond them is aptly illustrated. In Chart 4, below, we can see that prices reversed after touching the 200% pivot level. It is also worth noting that prices found resistance at the standard pivot high level in February this year before testing support near the pivot mid point.
Chart 4 – Current SPX high
click here for more detail
Again, it is important to remember that pivots are best used as a gauge that highlights potential support and resistance, rather than an absolute forecast level. Pivots often work best when two or more pivot levels fall at the same price over different time frames.
Pivot points can be used for daily, weekly or even hourly charts. The time periods that Traders use to calculate pivot points are based on the duration of their average trade and the perspective they require. As with all additional analysis techniques, pivot points are best implemented as a supplement to your current trading system.
Happy Trading
Jordan Craw
Trading Tutors Team
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