Trendlines and pivot points

In our previous articles we have discussed what trendlines are and how they can be useful in determining either continuation of a trend or a reversal of a trend.

We also mentioned briefly that pivot points are important and now I will explain why. For our purposes here a pivot is a turning point. A pivot point is the place at which a high or low in price has occurred and price has reversed and gone the other way for a time. A pivot point can occur on a 5 minute chart, a 60 minute chart, a daily chart, a weekly chart or a monthly chart. In short at any point in time where price has found a top or bottom a pivot point can be constructed.

It is this pivot point that represents a psychological milestone and mathematical point of reference for traders whom may want to enter into a position with a purchase or a sale of a stock.

In the case of buying stock; as a stock continues to make new highs there is, occasionally, some resistance to investors paying higher prices. No different than paying more for an item at the store that you might usually buy. If you see higher prices you sometimes feel resistance to paying more for an item. Gasoline prices are a recent relevant example. When selling stock in a weak market investors do the same thing in reverse they are used to the stock being at or above a certain price and when it goes below that price they sell so as to protect their profits or capital. Real estate prices are a good recent relevant example of selling into a weak market.

Pivot points represent the beginning of, the continuation of, or the end of a trend. The trendline connects pivot points and can help to determine several factors: 1. Direction of a trend 2. Current strength of price in relation to the trend as measured by the trendline 3. How far price can move and stay part of the current trend 4. At what rate price is accelerating.

While a stock is trending it will normally, in advance, give warning that its direction is about to change. The change can be subtle and take place over a number of hours,days, weeks or months depending on the time scale on the chart before marking its point of change.
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Envision a normal up-trending market as a slow build much like people going to the supermarket on a Saturday. It starts off slow and then builds and builds and builds during the course of the day. Think of a sell off as all those people running for the exits because a fire got started and everybody is running for their lives.

Strong momentum buying to the upside and sell off's to the downside; the timing of these events can usually be measured by Trendlines with comfortable predictability. We don't often know how hard or how far a price will rise or fall but we do know that when price breaks above a trendline it is more likely to rise and when price breaks under a trendline that it is more vulnerable to price erosion. This is particularly true of trendlines drawn on longer term charts as they are more likely to give an accurate indication of the strength of a trend in relation to its history.