Pivot Points

Pivot points are a set of calculated support and resistance levels based on the previous trading period's high, low, and close. The central pivot point (PP) is the average of these three values. From that central level, multiple support levels (S1, S2, S3) and resistance levels (R1, R2, R3) are derived using standard formulas. Floor traders have used pivot points for decades as reference levels where price is likely to stall, bounce, or reverse.

Why It Matters

Pivot points provide objective, pre-calculated price levels that remove subjectivity from support and resistance analysis. While drawing trend lines and eyeballing support levels can vary between traders, pivot points produce the same numbers for everyone. This consensus creates a self-fulfilling effect — many traders watch the same levels, and their collective actions at those levels reinforce them.

For options traders, pivot points serve as strike selection guides. When selling a put spread, placing your short strike below S1 or S2 gives it a buffer of institutional support. When buying a call, a break above R1 on volume can confirm directional strength. The levels also help you set realistic price targets for when to take profits.

How It Works

Standard pivot point formulas:

• PP = (High + Low + Close) / 3
• R1 = (2 x PP) - Low
• S1 = (2 x PP) - High
• R2 = PP + (High - Low)
• S2 = PP - (High - Low)
• R3 = High + 2 x (PP - Low)
• S3 = Low - 2 x (High - PP)

Types of pivots:

• Daily pivots: Calculated from the prior day. Most useful for day traders and 0DTE options.
• Weekly pivots: Calculated from the prior week's range. Useful for swing trades and weekly options.
• Monthly pivots: Calculated from the prior month. Useful for longer-term strategies and identifying major levels.

How to use them:

• Bullish above PP: When price opens or trades above the central pivot, the bias is bullish. Target R1 and R2 as resistance levels.
• Bearish below PP: When price is below the pivot, the bias is bearish. Watch S1 and S2 as support levels.
• Range-bound between levels: Price often oscillates between adjacent pivot levels. Iron condors and butterflies can exploit this.
• Breakout through a level: A decisive break above R1 targets R2. A break below S1 targets S2.

Limitations: Pivot points are less reliable in strongly trending markets where price blows through multiple levels. They work best when the market is finding a balance after a volatile period.

Quick Example

Yesterday, SPY had a high of $452, low of $447, and close of $450. The pivot point is $449.67, R1 is $452.33, and S1 is $447.33. Today SPY opens above the pivot at $450.50. You buy a 0DTE call targeting R1 at $452.33. SPY rallies to $452 and stalls near R1. You close the call for a profit, using the pivot resistance as your exit signal.