Secondary Movements and Market Strength: Insights from Jesse Livermore's Pivot Point System

Understanding the intricacies of market movements is crucial for traders and analysts. One of the legendary figures in the trading world, Jesse Livermore, developed a pivot point system that provides insights into these movements.

Livermore’s pivot point system is akin to a compass in the vast ocean of stock trading, guiding traders through the ebbs and flows of market movements with precision.

This article delves into the relationship between secondary movements and the overall strength or weakness of the market, as described in Livermore’s system.

1. Recording Prices: The Basics

Before diving into the complexities of secondary movements and market strength, it’s essential to grasp the foundational principles of recording prices. Livermore’s system emphasizes the importance of color-coding and specific recording methods to differentiate between various market trends.

1.1 Upward Trend Column

• Record prices in black ink.

1.2 Downward Trend Column

• Record prices in red ink.

1.3 Other Columns

Record prices in the other four columns using a pencil.

2. Drawing Lines: Identifying Pivotal Points

Pivotal points play a crucial role in Livermore’s system. By drawing specific lines under recorded prices, traders can identify these points, which serve as markers for potential market shifts. Understanding how and when to draw these lines is key to interpreting market movements accurately.

2.1 Upward Trend Column

• Draw red lines under the last recorded price when starting to record in the Natural Reaction column. This begins after a reaction of approximately six points from the last price in the Upward Trend column.

2.2 Natural Reaction Column

• Draw red lines under the last recorded price when starting to record in the Natural Rally or Upward Trend column. This begins after a rally of approximately six points from the last price in the Natural Reaction column.

2.3 Downward Trend Column

• Draw black lines under the last recorded price when starting to record in the Natural Rally column. This begins after a rally of approximately six points from the last price in the Downward Trend column.

2.4 Natural Rally Column

• Draw black lines under the last recorded price when starting to record in the Natural Reaction or Downward Trend column. This begins after a reaction of approximately six points from the last price in the Natural Rally column.

3. Transitions Between Columns

Market movements are dynamic, and prices often transition between different columns in Livermore’s system. Recognizing these transitions and understanding their implications is vital for assessing the market’s direction and strength. This section delves into the specific criteria that dictate these shifts.

3.1 Natural Rally to Upward Trend

• When recording in the Natural Rally column, if a price exceeds the last recorded price by three or more points, record that price in black ink in the Upward Trend column.

3.2 Natural Reaction to Downward Trend

• When recording in the Natural Reaction column, if a price is three or more points below the last recorded price, record that price in red ink in the Downward Trend column.

4. Key Price Recording

The same rules apply when recording the Key Price. However, use twelve points as a basis instead of six points used in individual stocks.

5. Explanatory Rules and Pivotal Points

• The last price recorded in the Downward or Upward Trend columns becomes a Pivotal Point as soon as you begin to record prices in the Natural Rally or Natural Reaction columns. After a rally or reaction has ended, you start to record again in the reverse column, and the extreme price made in the previous column then becomes another Pivotal Point.

6. Interpreting Pivotal Points

• Pivotal Points are of immense value in anticipating the next significant market movement. These points are highlighted with double lines in either red or black ink. They should be closely monitored, especially when prices are recorded near or at one of these points.

7. Market Strength Indicators

• Black lines below the last recorded red-ink figure in the Downward Trend column signal a potential buying opportunity.
• Conversely, red lines under the last price in the Upward Trend column indicate potential market weakness.

8. Secondary Movements: Indicators of Market Direction

• Secondary movements, as described in Livermore’s system, provide valuable clues about the market’s potential future direction. These movements, when analyzed in conjunction with Pivotal Points, can offer insights into the market’s strength or weakness.

Harnessing the Power of Secondary Movements

Secondary movements, as elucidated by Jesse Livermore’s pivot point system, are not just random fluctuations in the market. They are powerful indicators of the market’s underlying strength or weakness. By understanding and interpreting these movements in the context of the broader market trends, traders and analysts can make more informed decisions, potentially leading to more successful trading outcomes.