Pivot Point Reversal After an Uptrend

The pivot point reversal at a top occurs after an uptrend and suggests a reversal in trend to the downside. The uptrend is created by price bars making higher highs and higher lows. When a price bar follows by making a lower high and lower low and closing below the prior day's low, then a pivot point reversal has occurred. The price bar with the highest high is referred to as the "pivot high".

Pivot Point Reversal After an Uptrend

In contrast, the pivot point reversal at a bottom occurs after a downtrend and suggests a trend change upward. Downtrends are typically defined by price bars making lower highs and lower lows. Therefore, when a price bar follows this downtrend and makes higher highs and higher lows and closes above the prior bar's high, then a pivot point reversal has occurred. The price bar with the lowest low is named the "pivot low". Kirkpatrick & Dahlquist (2010) suggest that pivot point reversals create areas "where supply and resistance are likely to occur in the future" (p. 364).

Pivot Point Reversal Chart Examples

The chart above of the Nasdaq 100 ETF (QQQ) shows two pivot point reversal bottoms and one pivot point reversal top. A downtrend is created with five price bars with lower highs and lower lows. Then a price bar with higher highs and higher lows breaks above the high of the previous day and closes above that high. The following day confirms the change in price direction when prices break above the down-trending resistance trendline. From there an uptrend forms over the next 11 days. Then a price bar is created with a lower low and lower high and a close below the prior day's low. This price bar also closes below the uptrend support trendline; this adds to the credibility of the reversal signal. An eight day downtrend commences before another pivot point reversal bottom signal is triggered. Again the price bar has a higher high and a higher low and price closes above the prior bar's high. In this example, the price bar also closes above the downtrend resistance trendline – adding strength to the trend reversal pattern.

Works Referenced

1. Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
2. Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
3. The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html