The result of the market forming the pivot low is that all four market participants modify their behaviour in the light of that low being formed. Everyone is now watching that low level closely to see what happens. There are several possible outcomes when the market goes back down to test the previous low level:

1. The market turns around and rallies before even reaching the previous pivot low. This is extremely bullish and basically means that traders were so keen to get long or to liquidate short positions that they did not even wait for the price to move back down to pivot low.

2. The market trades back down to the pivot low and then turns around. The market is bullish but was not so sure of itself so that it had to go back to the previous level before traders would commit.

3. The market trades below the previous pivot low and then turns around and rallies. The market needed to look below the pivot low first to see if there was any new business there before it could feel safe enough to rally. The market is checking for resting stop orders placed just below the pivot low or to see if any uncommitted shorts were willing to come in below the pivot low. Since there was no new selling below the pivot low, the uncommitted longs now feel safe enought to buy the market which then rallies. This is actually a very good buy signal as the market now knows that there is little downside risk in the way of new selling orders. There is then only one way for the market to go and that is up.

4. The market trades below the previous pivot and new selling emerges. The market accelerates downwards sharply as the longs liquidate and the uncommitted shorts commit.

Thus, by watching the reaction of the market to the previous pivot low one can get a good indication of the strength or weakness of the market. This reaction to previous market highs and lows occurs on all time frames in the market.

On the subsequent pages some key levels that are worth watching are discussed.