Pivot Points & Divergence

In the hopes of keeping things as simple as possible, it may be helpful to understand exactly what our intentions are, when maneuvering through one market or another. I like to think of trading as nothing more than simply the process of weighing all the relevant information at hand, finding the next probable direction of the market, and then waiting for the movement where the appropriate trade provides us the highest possible reward for the least amount of relative risk.

The technical indicator used simply gives us another clue to the multi-dimensional relationship between the buyers and sellers over a given period of time. With this in mind, we may opt to use a common technical indicator known as "Pivot Points". These horizontal lines are simply a formula calculating the previous days high, low, and closing price, which are plotted as 3-support and resistance levels typically found on daily, weekly, or monthly charts.

These lines, like any technical indicator simply provide us with a suspect price level at which the market 'may' establish its next support or resistance level. As the market subsequently tests one of these price levels, we should now employ another technical indicator in order to determine if the market has in fact found new support or resistance. For example, the following (1-hour) chart shows the current position of the EURUSD. We can see the market established a double bottom pattern very close to the 1st Weekly Support Pivot Point. As this occurred the MACD began to trend back to the upside indicating a level of divergence in the trend. Traders noting this relationship may have decided to go long or buy the market at this point as the potential reward far exceeded the risk in the trade.

The market subsequently rallied and failed to break above the 1st weekly resistance Pivot Point standing just below the 1.2800 large round figure. As this occurred, the MACD began to travel back to the downside again indicating a level of divergence. Traders once again may choose to anticipate this current range to continue, placing their faith in Pivot Points and MACD Divergence. There is no way to know ahead of time with certainty if the market will in fact act as we believe it may. However through the use of Pivot Points and other technical indicators, our probabilities of success grow in our favor, and will surely help us in the long-run. Best of luck!!!