Con-tango

Pivot points

Pivot points reflect floor traders quick calculation of the day’s support and resistance levels, – I can believe that, it’s a tradition from the pre computer era…

Today’s Pivot price P is the dividing level of sentiment; above it,
the underlying is bullish, below it, the sentiment is bearish. It is
simply calculated by averaging the previous day’s high H, low L and
close C. Or,

P = (H + L + C) / 3

There are two resistance levels, R2 and R1, and two support levels, S2 and S1:

R1 = (2 * P) – L
S1 = (2 * P) – H

R2 = P + (R1 – S1)
S2 = P – (R1 – S1)

Let’s take CL0604 on December 27, 2005 as an example. It’s the
hammer day we see at the end of the month, which has the lowest low.
For this day, the high was $59.12, the low $58.50 and it closed at
$59.10.

So, filling in our little equations we have:

P = (H + L + C) / 3 = (59.12 + 58.50 + 59.10) / 3 = $58.91, in blue;

R1 = (2 * P) – L = (2 * 58.91) – 58.50 = $59.31, in red;
S1 = (2 * P) – H = (2 * 58.91) – 59.12 = $58.70, in green;

R2 = P + (R1 – S1) = 58.91 + (59.31 – 58.70) = $59.52, in red; and
S2 = P – (R1 – S1) = 58.91 – (59.31 – 58.70) = $58.30, in green.

As
the chart clearly shows, December 28 was a brutally bullish day, with a
gap opening above R1, and R2 was surpassed with ease, never to fill
that gap again…

Floor traders test these levels; so, a trade should be entered  a
reasonable distance away from the pierced (or not) level, following the
direction of price movement.

To avoid doing the calculations, try Jerry Medved’s Quotetracker charts with pivots included, – I sware by them; or, tradesignal’s pivots.

In summary, pivot levels are testing levels; I find them to be as
important as the daily high, close and low, – I recommend including
them in your charts.

Nuff said, Happy trading guys!