What is a pivot low in technical analysis?

A pivot low in technical analysis is defined as a price point on a chart where the price has declined to a low, followed by an increase in price to demonstrate a potential reversal. This typically occurs after a series of lower lows and is often seen as a sign of a potential change in trend from downward to upward.

The relevance of the correct answer lies in its identification of a pivot low as a reversal point, which signifies a shift in market sentiment. This can be used by traders to identify potential entry points into long positions or to adjust their strategy based on the market direction. This price action indicates that after reaching that low, buyers may be entering the market, leading to higher prices, which traders seek to capitalize on.

Other options may misinterpret the concept of a pivot low or attach conditions that do not accurately reflect its definition. For example, asserting that it is a key price point below which the stock will not drop suggests a certainty that may mislead traders, as prices can and do breach levels deemed significant. Additionally, identifying it solely as a reference point does not capture the dynamic nature of the pivot low being a pattern indicative of reversals rather than just a static point. Lastly, suggesting it as a level where traders should always enter trades