Pivot Points: an Indicator to Show a Trader How High or Low Price is Apt to Go

pivot points for the stock market

Traders always wonder how high the price will rise when they decide to enter a call option trade or how low the price will drop when they are considering a put trade. So, is there one easy to read indicator that will share this information? 


Simply put, the answer is yes. The indicator we are going to discuss is called Pivot Points.


Pivot Points are significant levels chartists can use to determine directional movement and potential support/resistance levels. (I think of Support and Resistance as Floors and Ceilings.) Pivot Points use the prior period’s high, low, and close to estimate future support and resistance levels. These calculations are done for you by the charting service. In this regard, Pivot Points are predictive or leading indicators.


The two lowest lines are marked with an “S” for support and act as a floor. The middle line has a “P” for pivot or the area of a switch from support to “R” for resistance or thought of as a ceiling.  The indicator takes the high and low-price movements, calculates them, and draws a line on a chart saying this is as high price is likely to go. It may get stuck here and will take a strong effort to push through.  If or when price does push through, that line or what might have been thought of as a ceiling now becomes a floor which supports price from dropping further. 


To take this further, let me explain the marked levels of the indicator.  If price’s candle is sitting on a line, and that line is acting as a floor or a support line, price is apt to stay at this level until it builds the strength to rise further.  There are times price will drop through and then will rise again, so that only the wick at the end of the day is below the line.  This is a test of sorts to see if support will hold.  It works in a similar way when price rises.  Will price cruise through the overhead line or will it be stopped by the ceiling?  Often it is stopped or at least for a while.  Often it gets stopped at this resistance level, it will pullback, retest a support level and then rise to retest to see if it is strong enough to break through this time.  


As seen in the video, there are times that a support or resistance level is tested over and over and lasts for months. It takes great effort to break through.  It is very helpful to be aware of these levels ahead of time, so you can evaluate the information.  Is a trade likely to be worth the effort if it gets stopped at a support or resistance level that is close to the current price?


This indicator and its lines make it easy for new traders to look at a chart to see where price has been at a low, how high it has risen and where it is apt to pause at least for a while before it breaks through. Once you grasp how Pivot Points work, the next step is to learn how to quickly analyze a chart to determine where price is apt to stop as it rises or drops. I am going to share the image of a chart for the Lowes (LOW).


by Stockcharts.com

The movement of the stock’s price and how it reacts when it reaches the support and resistance of the Pivot Points is not a 100% accurate fortune-teller, but it definitely suggests how high price is apt to rise or how low it may drop the majority of time.  Notice the areas where it consolidates for a period in one month is the same area it pauses in another month.  There are many time that the area price pauses in a rise is then the area that supplies support in a drop that happens later.  


It is important to understand that price has memory and repeats its movements.


My goal is to teach everyday people how to trade options, to learn to read charts, and while they are learning, they can participate in a program like ALPHA that trades the daily charts like the chart above.  I think of this as an earn-while-you-learn program that is perfectly suited for people who are interested in learning to trade options as well as have the opportunity to earn a profit as part of the learning process. If you are interested in learning more, contact FFR Trading today!

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