If enough traders focus on a particular chart feature then, by default, there is a high chance it will influence market behaviour. Short-term traders, particularly in the forex space, talk about the market’s ‘memory’ for influential price levels. Striving to systemise where these thresholds might exist in the future, many chartists favour the approach for defining future support and resistance known as ‘pivot point’ analysis.

These calculated pivot support and resistance lines are plotted about a central pivot line. This primary indicator is itself generated by typically taking the average of the relevant time frame high, low and close. If you are using the technique for day trading the look-back period might be the previous day’s trading session and the pivot will be the average of yesterday’s high, low and close.

The methodology is also relevant to traders focused on longer and varying time horizons so the look-back period could encompass the previous week’s or month’s activity. At times the derived pivot levels seem to have an uncanny knack of divining future critical price support and resistance levels.

Having calculated the relevant central pivot line, the system calls for two further lines of potential resistance above it and two possible support lines below it. The first pair is derived by examining the difference between the central pivot line and the previous price high or low. Mathematically the first resistance level R1 above the central pivot line equates to twice the pivot line value less the preceding low price. Meanwhile the first support line S1 is calculated by doubling the central pivot line value and subtracting the preceding high's level.

The wider set of pivot lines, R2 and S2, are determined by respectively adding or subtracting the preceding session’s high-to-low range from the central pivot line value. Some traders favour a succession of wider pairs of indicators whose values are fathomed by adding or subtracting multiples of the preceding high-to-low price range from the central pivot line.

When the market is seen to trade predominantly above the central pivot, the dominant bias in sentiment is usually positive and vice versa. Fluctuations about the central pivot line signal non-trending, directionless conditions. The favoured approach to using pivot levels is centred on any price bias seen relative to the central pivot line. An upward break through this line would indicate an up trend and so a ‘buy’. A subsequent move toward the higher first resistance line, R1, would merit a move to tighten protective stops or possibly even close out the position.

If R1 gives way, the next stop should be the higher resistance line, R2.

This is a daily open/high/low/close price bar chart of the FTSE 100 with the rolling weekly pivot levels superimposed. Price activity below the central pivot line (coloured in gold) is considered bearish in tone whilst activity above this line is seen as bullish. The two sets of support and resistance lines are observed to constrain individual bar moves during these trends.