Influence of Secondary Movements on Trend Analysis: Jesse Livermore's Pivot Point System

Understanding the intricate details of Jesse Livermore’s pivot point system provides invaluable insights into the influence of secondary movements on trend analysis.

In the vast ocean of stock market trends, secondary movements are the undercurrents that shape the waves. Recognizing them is the key to navigating the market’s ever-changing tides.

This article delves into the significance of entries in the Secondary Rally and Secondary Reaction columns and their implications for market trend interpretations.

1. Basics of Recording Prices

Understanding the foundation of Jesse Livermore’s system begins with the basics of recording prices. The way prices are recorded can provide insights into the market’s direction.

Upward and Downward Trends

• Upward Trend: Prices are recorded in black ink.
• Downward Trend: Prices are recorded in red ink.

Other Columns

Prices in the other four columns are recorded in pencil.

2. Drawing Lines: The Significance

Drawing lines in the pivot point system is not arbitrary. Each line, whether red or black, carries specific implications for trend analysis.

Upward Trend Column

• Red lines are drawn under the last recorded price in the Upward Trend column when figures start being recorded in the Natural Reaction column. This is initiated on the first reaction of approximately six points from the last price in the Upward Trend column.

Natural Reaction Column

• Red lines are drawn under the last recorded price in the Natural Reaction column when figures start being recorded in the Natural Rally or Upward Trend columns. This is based on the first rally of approximately six points from the last price in the Natural Reaction column.

Downward Trend Column

• Black lines are drawn under the last recorded price in the Downward Trend column when figures start being recorded in the Natural Rally column. This is initiated on the first rally of approximately six points from the last price in the Downward Trend column.

Natural Rally Column

• Black lines are drawn under the last recorded price in the Natural Rally column when figures start being recorded in the Natural Reaction or Downward Trend columns. This is based on the first reaction of approximately six points from the last price in the Natural Rally column.

3. Secondary Movements: Rally and Reaction

Secondary movements, as indicated by the Natural Rally and Natural Reaction columns, play a pivotal role in trend analysis. These movements can provide early signals for potential trend reversals or continuations.

Natural Rally Column

• When recording in the Natural Rally column, if a price exceeds the last recorded price by three or more points (with black lines underneath), it should be entered in black ink in the Upward Trend column.

Natural Reaction Column

• When recording in the Natural Reaction column, if a price is three or more points below the last recorded price (with red lines underneath), it should be entered in red ink in the Downward Trend column.

4. Implications for Trend Analysis

The way prices are recorded in the pivot point system can offer profound insights into the market’s potential direction. By understanding these implications, traders can make more informed decisions.

Pivotal Points

• Two pivotal points are established based on the entries in the Natural Reaction and Natural Rally columns. These points play a crucial role in determining whether the positive trend will resume or if the movement has ended.

Secondary Rally and Reaction Columns

• If a rally occurs after recording in the Natural Reaction column but doesn’t exceed the last price in the Natural Rally column, the price should be recorded in the Secondary Rally column. This continues until a price exceeds the last figure in the Natural Rally column, after which recording resumes in the Natural Rally column.

Key Price Considerations

• The same rules apply when recording the Key Price, but with a basis of twelve points instead of six points used for individual stocks.

5. Explanatory Rules and Pivotal Points

Jesse Livermore’s system is not just about recording prices. It’s about understanding the significance of these prices, especially when it comes to pivotal points.

Significance of Pivotal Points

• The last price recorded in the Downward or Upward Trend columns becomes a pivotal point as soon as recording begins in the Natural Rally or Natural Reaction columns. After a rally or reaction has ended, recording resumes in the reverse column, and the extreme price in the previous column becomes another pivotal point.

Value of Pivotal Points

• After two pivotal points have been established, these records become invaluable in anticipating the next significant movement. These points are highlighted with double lines in either red or black ink and should be closely monitored.

Deciphering the Influence of Secondary Movements

Secondary movements, as recorded in the Secondary Rally and Secondary Reaction columns, offer profound insights into potential trend reversals or continuations. By meticulously analyzing these entries in conjunction with pivotal points, traders and analysts can make more informed decisions, ensuring they are in sync with the market’s pulse.

Jesse Livermore’s pivot point system serves as a robust framework for understanding these nuances, emphasizing the importance of secondary movements in trend analysis.