the hAnDbook of technIcAl AnAlySISdifference between the previous day’s low and PP upward from the PP price. See
Figure 8.25. We can clearly see why it is called the pivot point. It is around this PP
that the previous day’s volatility is incorporated into the next day’s projections.
If the previous day was volatile, it would tend to create a larger range. This will
affect the next day’s projection levels. Note that if the previous day’s close was
above its midprice, the new projected levels would all be raised the next day.
Hence, it is essentially a trend‐following overlay indicator
To construct the second pivot support level, we subtract the previous day’s
range from the PP, and to construct the second pivot resistance level we add the
previous day’s range to the PP. See Figure 8.26. We see that by adding yesterday’s
range, we are incorporating yesterday’s volatility into the current day’s projections.
Hence, it is essentially an indicator of potential future volatility.
To construct the third pivot support level, we subtract the previous day’s range
from the first support level, and to construct the third pivot resistance level we
fIgure 8.25 Constructing the First Pivot Resistance and Support Level.
fIgure 8.26 Constructing the Second Pivot Resistance and Support Levels.