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232 PART 7 - Indicators: The Trader’s Compass

   Notice the VWAP line. Why does Apple constantly return to it? Simple:
when the stock is above the line, which makes it considered “expensive,”
institutional traders instructed to sell do so; and when it is below the line,
therefore considered “cheap,” institutional traders instructed to buy do so.

Additional Practical Uses
   When a stock showing an uptrend pulls back, i.e. returns down, how

far will it go? You have probably answered correctly: to the VWAP. At this
point, institutional traders will start buying again, and it is highly probable
that this is also when the price will begin rising again.

   What happens if the price is not supported but continues trending
down? If the downtrend leads below the VWAP level, it is reasonable to
assume that the stock has reversed its pattern. Buyers who had been the
victors are now defeated. In the balance of power, buyers and sellers have
changed places. The clearest support for that assumption is that even the
institutional traders are not buying.


Pivot points are actually intraday lines of support and resistance. We can
display them on the stock or index chart we are following. When the price
drops down to the pivot line or rises up to it, the line serves as support or

   Pivot points are based on a calculation that averages the highest price,
the lowest price and the previous day’s closing price. Later we will learn
how the calculation is made.
•	 Pivot points are represented on the intraday chart by five lines: S1, S2,

   PP, R1, R2.
•	 S = support, R = resistance

   Pivot points have two functions:
	1.	 They allow us to determine market trend. A breakout of the first

   resistance line, R1, indicates a good chance of a continued uptrend; vice
   versa, a breakdown through the support line, S1, indicates a downtrend.
	2.	 They determine entry and exit points. For example:
   o	 When the pivot line is broken, the next anticipated resistance line

       is at R1. Therefore, at this level, it is worth taking some profits or
       buying above it.
   o	 If this first line of resistance, R1 is also broken out, the next goal is
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