The importance of pivot points and zones in technical analysis

Pivot points and zones are essential tools in technical analysis, but they’re often overlooked. They can act like magnets for price and frequently turn into support or resistance. Learning to spot them can help traders better understand market moves.

There is a misconception in technical analysis that support and resistance levels keep their same role as price action evolves.

The simplest example for this misconception is when all-time highs are broken – what used to be a resistance level at previous highs for an asset tends to become support, when prices retest the previous highs.

In this example, you may spot how the 2021 all-time high in Bitcoin prices, between $65,000 to $75,000 initially acted as resistance before then turning into a key support.

This transformation of resistance to support (and vice versa) happens on all timeframes.

Pivot points and zones behave the same, where a previous support/resistance becomes the key level to help estimate if the price action is bullish or bearish.

May it be bullish or bearish, a pivot point or zone may help to assess if sentiment is still going towards the trend or if, by passing above/below the pivot zone, a reversal is now of higher probability.

In the chart above, we establish that the commodity in question, here platinum, is in a trending environment by looking at the upward trendline and the upward-sloping 200-period moving average.

After marking intermediate highs, platinum retraced back to its mid-June level, which previously served as resistance and, because of this, already served as a key resistance level.

With the downward correction happening at the end of July, prices have found an intermediate bottom around similar levels to the mid-June level, which now serves as a pivot for future action.

Looking at where the prices ranged, as they held the trendline and wicked above and below, technical theory suggests that any breakout from here would generate either a continuation of the upward trend (on an upside breakout) or a trend reversal (on a downside breakout).

It seems that buyers are currently trying to push the commodity to an upside breakout from the pivot zone – if they do manage to take the hand, the current pivot zone would then turn into a Support.

This area is essential for both bull and bear price action scenarios, making it an ideal pivot zone for technical analysis.

Pivot zones in range-bound price action are usually found right around the middle of the ranges and usually serves as a magnet for prices when they reach the extremes.

Range-bound trading helps to determine a balance in pricing, where the middle zone becomes a key for intra-range momentum. Above the middle pivot, it is typical to see prices reach the higher bound of the range and vice versa.

It gets interesting when a price reaches the low level of a range, and rejects the middle pivot as - in this hypothetical example - sellers would anticipate the high of the range and use the pivot as a supply zone.

In this instance, the pivot zone turns into resistance and probabilities of a downside breakout increase. The same works for an upside breakout.

On this WTI Oil chart, we can observe two different pivot zones.

• The immediate pivot (blue zone) is located at the preceding July range lows–for context, US Oil prices were range-bound between $65 to $71 during that month.
  The current pivot zone is located between $65 and $66 and was previously acting as support.
  The pivot zone may now serve as either a new resistance, or as a support again, depending on whether the price manages to breach its higher bound.
  
  The binary nature of this region of interest allows to consider it a pivot zone, as prices haven’t retested these levels yet.
  
• The preceding pivot (yellow zone) is located at the middle of the July range from $67 to $68. You may observe how prices magnet around that zone during the entire past month.
  Finally, throughout the final week of July to the beginning of August, prices crossed the preceding pivot (yellow box) from top to bottom and retested it a final time (orange circle) before correcting lower – you may observe how the introductive lines to the range-bound example applies here.
  
  Having been used as a supply zone for its most recent test, what was the mid-range pivot in July has now become resistance.
  
  To spot the current level which will impact whether the intermediate momentum is bullish or bearish, look at what previously acted as support, the blue $65 to $66 zone.

Pivot points and zones are key levels to form a better idea in technical analysis whether momentum is more bullish or bearish.

Acting as magnets, and changing nature between support and resistance, they serve as zones of interest for different participants to act.

Keeping the pivot zones in check helps traders to assess the current market bias and assist decision-making.