Pivot Points are used to project potential support and resistance levels. The main time periods used are daily, weekly, and monthly pivots. The formula for the daily pivot point, support, and resistance is shown below :
- Pivot Point = [Yesterday's High + Yesterday's Low + Yesterday's Close] / 3
A 15-minute chart of the mini-Dow futures contract and the corresponding floor trader pivots are shown below:
Support Levels
- S1 = [Pivot Point * 2] – Yesterday’s High
- S2 = Pivot Point – Yesterday’s High + Yesterday’s Low
- S3 = S2 – Yesterday’s High + Yesterday’s Low
Resistance Levels
- R1 = [Pivot Point * 2] – Yesterday’s Low
- R2 = Pivot Point + Yesterday’s High – Yesterday’s Low
- R3 = R2 + Yesterday’s High – Yesterday’s Low
To calculate weekly or monthly numbers, simply replace "yesterday’s" with "last week’s" or "last month’s" high or low.
Pivot Point Example
In the chart above, and going from left to right, Resistance Level 1 (R1) held and the Dow Jones Industrial Average mini-Dow futures contract reversed course and headed downward.
After that, the next potential support was at the Pivot Point. However, the mini-Dow broke through the Pivot Point. Notice that when the mini-Dow attempted to reverse course, it was rejected by the Pivot Point now acting as resistance. An important technical analysis concept is that when resistance is penetrated the prior resistance then becomes support. Similarly, when support is penetrated the prior support then becomes resistance
From there, the next support was Support Level 1 (S1). S1 held strong and the mini-Dow reversed direction yet again.
The next resistance line was at the Pivot Point, which failed.
The trading day ended by the mini-Dow testing the Pivot Point, now acting as support, which subsequently held. From there, the index rallied on into the close.
More ways to use Pivot Points is discussed on the next page.
