Window Oscillators and Overlay Indicators
add the previous day’s range to the first resistance level. And in similar fashion, the
fourth support level is constructed by subtracting the previous day’s range from
the second support level, and to construct the fourth resistance level we add the
previous day’s range to the second resistance level. See Figure 8.27.
A popular way to gauge the day’s action is to identify if price has opened
below or above the PP. If it has opened below the PP, the current day’s prices are
expected to drift lower, and if it has opened above the PP, the current day’s prices
are expected to drift higher.
The violation of the second support or resistance levels indicate a strong
downtrend or uptrend is in effect, while the third resistance and support levels
represent extreme overbought and oversold levels, respectively. If the day is quiet
and non‐eventful, prices should stay within the first pivot support and resistance
levels. See Figure 8.28 for price interacting with these pivot point levels. Besides
using pivot point levels for initiating entries, many practitioners use the levels as
a basis of exiting a position.fIgure 8.27 Constructing the Third and Fourth Pivot Resistance and Support Levels.fIgure 8.28 Price Reacting to Pivot Points on the Daily Chart of Goldman Sachs
Group Inc.
Courtesy of Stockcharts.com