To extend the metaphor of “Trading is like Driving” a little further, you could think of the market’s pivot points to be like lanes on the highway.
When you are driving on the Interstate or even just in town, the lane markers have come to take on an important meaning ion the minds of every driver ion the road. This meaning is something created out of the minds of drivers everywhere and acted upon as if they are true, not because of any intrinsic meaning inherent ion the lines themselves.
Behavior of drivers changes as they approach lane markers, not because the strips of paint have any physical ability to affect the motion of the car or truck, but because the mental model of driving is so firmly ingrained in the minds of all drivers. The lines act as if they constrain the movement of traffic within their boundaries.
An observer from Mars might wonder what magic powers these lines of paint have, but the magic is in the mind.
In the same way, pivot points affect trader decisions on a daily basis in the trade of the broad market (and by this I mean the S&P 500 and its ETF, symbol SPY).
Pivot points, briefly, are support and resistance levels calculated by traders in the futures pits who use these as reference points to judge the theme of the day and make decisions about how to buy and sell the ebb and flow of prices throughout the day.
As price approached these pivot points. Price tends to converge and go into a congestion zone of backing and filling. Breakouts from these pivot points can be volatile and fast and can offer the best reward to risk ratios of any trades during the day.
Because large cap stocks and ETFs that track broad market regions and sector trade with a such a high degree of correlation with the broad market, it is a definite edge to the agile trader who can monitor the relationship of his preferred target of the moment to the broader market movement during the day.
When there is high correlation, you will be able to see whether your target or the market itself seems to be making the first move. Once you identify the leader, you can trade the follower more safely, since the leader, where you have no money at risk will give you a heads up on likely moves in your preferred target in the near future.
Many times this early warning can be a couple minutes or as few as a couple seconds. In any case that is enough edge for you to dramatically improve your bottom line in the conduct of the daily trade.
Bottom line; pay attention to pivot points if you are trading large caps and broad ETFs.