---
description: "Derives support and resistance levels from the previous day's pivot point and trades breakouts or reversals relative to these computed price levels."
tags: [stocks, technical-analysis, support-resistance, pivot-point]
---

# Support and Resistance

**Section**: 3.14 | **Asset Class**: Stocks | **Type**: Technical Analysis

## Overview
This strategy uses "support" (S) and "resistance" (R) levels computed from the previous day's high, low, and closing prices via a "pivot point" (center) C. The trader establishes or liquidates positions based on whether the current price crosses the center, reaches the resistance, or falls to the support level.

## Construction / Signal
Using the previous day's high `P_H`, low `P_L`, and closing `P_C` prices:

**Pivot point (center)**:
```
C = (P_H + P_L + P_C) / 3                                 (325)
```

**Resistance level**:
```
R = 2 * C - P_L                                           (326)
```

**Support level**:
```
S = 2 * C - P_H                                           (327)
```

**Trading signal** (P is the current price):
```
Signal = { Establish long position if P > C
          { Liquidate long position if P >= R
          { Establish short position if P < C
          { Liquidate short position if P <= S              (328)
```

## Entry / Exit Rules
- **Long entry**: Current price P crosses above the pivot center C.
- **Long exit**: Current price P reaches or exceeds the resistance level R (take profit at resistance).
- **Short entry**: Current price P crosses below the pivot center C.
- **Short exit**: Current price P falls to or below the support level S (take profit at support).

## Key Parameters
- **Price inputs**: Previous day's High (P_H), Low (P_L), Close (P_C)
- **Pivot definition**: Standard: `C = (P_H + P_L + P_C) / 3` (other definitions exist)
- **Holding period**: Very short-term (intraday to 1 day); pivot levels are reset daily

## Variations
- **Open-price pivot**: Some definitions use the current day's open price instead of the prior close P_C
- **Higher/lower support-resistance levels**: Extended pivot systems define multiple support/resistance levels (S2, S3, R2, R3)
- **Breakout mode**: Instead of reverting at S/R, treat a break through R as a new long entry (trend-following variant)

## Notes
- Support and resistance levels are reset daily using the previous day's OHLC data.
- The strategy is primarily intraday or very short-term (daily bar).
- There is substantial literature on support/resistance strategies but academic evidence for profitability is mixed.
- Can be combined with volume confirmation: signals are more reliable when price breaks through S/R levels with increased volume.
- The pivot point methodology has many variants (using open price, weekly pivots, Fibonacci ratios, etc.).