At their core, pivot points are integral to understanding an asset's historical price action. By marking the previous turning price points and connecting them, pivot points form key support and resistance levels.
But did you know technicians are not the only ones benefiting from pivot points?
Even the fundamentalists find value in pivot points.
As pivot points serve as the key support and resistance, the price-pivot points interactions indicate the prevailing sentiment of the market participants – whether it's bullish or bearish.
In this TradeGeek lesson, we'll look at the lens of pivot points in technical analysis to explore their relevance to fundamental analysts. By the end of this lesson, you'll learn how to use pivot points to measure and make sense of the prevailing market sentiment.
Pivot points pioneered how investors, traders, and speculators monitor and identify the price movement of financial assets. These technical indicators were among the first used in the earliest form of financial trading, called floor trading.
With pivot points, floor traders anticipate when the asset will move in the coming days and its underlying volatility.
Today, pivot points remain in their reign. But the catch is that they've become more sophisticated through technological advancement.
Pivot points can now do the following to help technical traders identify profitable entry and exit points:
Pivot points are tightly associated with technical analysis. In fact, it's generally considered a technical indicator.
However, the interesting dynamic of the market makes such indicators a valuable tool for fundamental analysis as well.
Due to its implication for the market's key support and resistance levels, this technical indicator became an integral tool to understand the prevailing market sentiment and identifying its potential shift.
Pivot points calculate an asset's closing, high, and low prices from the previous trading day.
Pivot Point Formula:
(High + Low + Closing) / 3
The pivot point value was then used to identify the asset's key support and resistance levels from the previous day.
| Resistance 1 | (P X 2) - Low |
| Resistance 2 | P + (High – Low) |
| Support 1 | (P x 2) - High |
| Support 2 | P - (High – Low) |
The calculated support and resistance levels serve as the price threshold for potential reversal.
The logic behind this is that these market zones are concentrated with market pressure enough to reverse an established trend.
In other words, asset trading within the established S/R levels indicates investors' confidence in the prevailing trend. However, as the price approaches the threshold, such confidence dies down, causing a shift in sentiment and reversal.
Using pivot points as reference points for the prevailing market sentiments and their potential shift.
Let us discuss how to use pivot points to measure market sentiment.
Noticed that the price is trading above the pivot point? That’s an indicator of bullish sentiment.
This suggests buyers dominate the market, creating upward pressure on prices.
A price above the pivot often reflects optimism among traders and the potential for continued growth.
Additionally, the signal further reinforces the bullish outlook if the price breaks through key resistance levels (R1 or R2).
With increased buying interest or a positive market outlook, these breakouts indicate a potential for sustained upward momentum.
Traders often see such movements as an opportunity to enter long positions, anticipating further price increases.
On the flip side, a bearish sentiment forms when the price dips below the pivot point.
The formation of a bearish sentiment suggests that sellers hold the upper hand in the market. With the bears taking over the market, they create a downward pressure in the market that indicates an extended price decline.
A price below the pivot often reflects pessimism or a lack of confidence among traders.
If the price breaks through key support levels (S1 or S2), it can signal even stronger bearish momentum.
These breakdowns often suggest that selling activity is intensifying, possibly fueled by negative market news or broader economic concerns. Traders watching for these signals might consider short positions, expecting the market to continue its downward trend.
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