Support and Resistance in Disguise

SUPPORT AND RESISTANCE IN DISGUISE    

          If a market departs too far from the mean or moving average, there are two sides to consider: one from a profit perspective, and the other from a risk perspective. Institutions and professional traders know this and will have a predetermined price level calculated to either enter or exit a position. In laymen’s terms, if a market went too far too fast, it is time to get out and take a profit or to take advantage of an extreme price move by initiating a countertrend trade. So in order to gauge what the standard deviation is, many professional traders use pivot point analysis because it is based on a testable method.

Pivots are disguised price points because they cannot be detected most times using such conventional technical analysis techniques as traditional support and resistance trend lines, Fibonacci levels, and Gann fan angles, and indicators like moving averages and such oscillators as the CCI (commodity channel indicator), stochastics, and the MACD (moving average convergence/divergence) studies. It is imperative that you know how to determine where the pivots are so you are aware at what time and price level the market will most likely change direction. That does not mean to say that at times pivot points coincide or line up near one of these other technical studies. In fact, pivot point levels coincide frequently with Fibonacci extension correction levels, which are referred to as confluence or coincidental factors. I will explain that in more detail as well.

Pivot point analysis is the best “right side” of the chart indicator, as I like to call it, due to its predictive accuracy. It is a mathematical formula, as I understand, originally developed by Henry Wheeler Chase in the 1930s. Chester W. Keltner used part of the formula to develop the Keltner bands as described in his book, How to Make Money in Commodities (Keltner Statistical Service, 1961). However, it was really Larry Williams who was credited with re-popularizing the analysis in his book How I Made One Million Dollars Last Year Trading Commodities (Windsor Books, 1979). Don Lambert, the creator of the commodity channel indicator, uses the pivot point formula that makes the CCI work.

In my first book, A Complete Guide to Technical Trading Tactics (Wiley, 2004), I illustrated many trading methods that you can apply using pivot point analysis, including the power of multiple time frames or what is know as confluence of various target levels. This book will highlight those techniques, as well as explain how to incorporate the pivot point as a moving average trading system and how to filter out and narrow the field of the respective support and resistance numbers, and will divulge various formulas that are popular today.