PIVOT HISTORY
The pivot point is essentially a mechanism for analyzing the short-term supply
and demand factors affecting the market. It has limited applications for long-
term decision making. Professional futures floor traders, also known as
locals, are the biggest proponents of the pivot technique. Scalpers, brokers,
market makers, and other short-term traders also use the technique, while
upstairs or longer-term traders occasionally look at the pivot for ideas of
what the floor traders are doing.
The pivot point is basically the weighted average price of the previous trading
day, calculated as the average of the previous trading day's high, low, and
closing prices. It represents the major point of inflection each day.
Unless there has been significant market news between the previous trading
day's close and the current trading day's opening, locals often try to test the
near term support, resistance, and pivot point.
For example, many floor traders cover their shorts and go long into the pivot
level if the market opens above the pivot point and starts to sell off.
If the market rallies from the pivot point, locals begin liquidating into the
primary resistance level (R1) and take short positions. Should the near term
resistance level fail, however, it is likely the second resistance level (R2)
will be tested as locals lean on the market by covering their shorts and going
long trying to push the market to the next higher inflection point. If the
second resistance level (R2) fails, because of market influencing news or
observations, intermediate term positional players are likely to enter the
market and make the market trend.
The same method of leaning on inflection points also occurs if the market is
below the pivot point. Locals lean on the primary support level (S1) and take
long positions hoping to push the market back to the pivot point. If the
primary support level (S1) fails, locals liquidate their long positions and go
short looking for a move down to the secondary support level (S2).
