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Concepts & Tutorials

MV Chronicle: Pivot Points

In last week’s MarketVision Chronicle, I wrote about Pivots, a useful technical level indicator. (Registration required, free)

Pivot Points

When you trade a market you sometimes have no basis for what the stock is supposed to be doing in the short term. An interesting way to look at levels on a chart is to look at points of support and resistance. We’ve seen trendlines and support lines, but there’s another interesting, short term level calculation: Pivot Points.

The Pivot of a day depends on the previous day. The formula is:

Pivot = (Close + High + Low)/3

The reason you don’t take the open is that the open can be quite volatile. Now in India I would actually give a higher rating to the close, because it is the weighted average of all the trades in the last 30 minutes – so the chances of a freak trade value are substantially lesser. So I would say:

Pivot = (Close*2 + High + Low)/4

This is one point, and you calculate supports and resistances like this:

Support 1 = Pivot – (distance of Pivot from yesterday’s high) = Pivot – (High – Pivot) = 2P-H.
Resistance 1 = Pivot + (distance of Pivot from yesterday’s low) = Pivot + (Pivot – Low) = 2P-L

Subsequent levels are S2, R2, which are:

S2= (Pivot – R1S1 Range) = Pivot – (R1– S1)
R2 = Pivot + R1S1 Range = Pivot + (R1– S1)

These are usually enough, but sometimes you need the next set of support/resistances, which are essentially another range away.

S3 = Low – 2*(H-P)
R3 = High + 2*(P-L)

Let’s do this with some stocks:
Three Stocks

(Read the entire chronicle)