Defining zones

Support and resistance zones can be identified by a three-bar chart pattern called the pivot low or pivot high. A pivot low is three attempts by the market to trade down, with the middle bar (bar 2) the lowest low of the three. Bar 3 holding above bar 2’s low indicates a lack of selling pressure and reverses the trend to up, at least temporarily. Bar 2’s low is the lowest support point and defines the lower end of the support zone.

A pivot high is three tries by the market to move up, with bar 2’s high being the highest high of the three. The inability to trade above bar 2’s high indicates a potentially weak market. The extreme high of a pivot high (bar 2) is the upper side of the resistance zone.

Other components of the pivot high or low pattern form the other side of the support or resistance zone. It shows how two different price points can be used as the upper level of a support zone. The first is the close of bar 2, unless the close is higher than the midpoint of bar 2, in which case the low of bar 3 is used.

The lower boundary of a resistance zone is the close of bar 2 unless the close is below the midpoint of bar 2, in which case the high of bar 3 is used. It shows a support zone on a 30-minute chart of the Euro/U.S. dollar pair (EUR/USD). In this case, bar 3’s low was used for the upper side of the support zone because bar 2’s close was above its midpoint. The market formed a support zone, traded sideways to lower back into the support zone, formed a second, higher pivot low, and then rallied from there. Often two consecutive pivot lows (with the second higher than the first) signal a market is about to advance.

The lower side of the first resistance zone was defined by bar 2’s close. After this initial resistance zone, two more pivot highs formed. Bar 2 of each high of these pivots peaked within the original resistance zone (at slightly lower prices — a sign the market was weakening).