In Reminiscences of a Stock Operator — Jesse Livermore placed deep emphasis on two things:
1 - The study of general conditions and
2- The line of least resistance.
General conditions refers to the big picture, i.e. the macro backdrop. It centers around questions like:
• Is liquidity (credit) plentiful, or is it scarce?
• Are equities generally overvalued or undervalued?
• Where are we in the business cycle?
• How much debt and leverage has accumulated?
• Euphoria, apathy, optimism, panic… which fits?
• Is risk appetite waxing or waning?
"But I can tell you after the market began to go my way I felt for the first time in my life that I had allies — the strongest and truest in the world: underlying conditions. They were helping me with all their might. Perhaps they were a trifle slow at times in bringing up the reserves, but they were dependable, provided I did not get too impatient". - Reminiscences of a Stock Operator
The path of least resistance
Jesse Livermore described the pivot point as the LINE OF LEAST RESISTANCE. A stock can move very fast once it crosses this threshold. When a stock breaks through the line of least resistance, the chances are the greatest that it will move higher in a short period of time. This is the case because this point represents an area where supply is low; therefore, even a small amount of demand can move the stock higher.
The path of least resistance is a fact of nature. Rivers always flow around a mountain rather than through it. Electricity always moves through a circuit’s “easiest” route. The path of least resistance means taking the easiest route. Naturally choosing the easiest option. As humans, this trait is inherent as it is in nature.
“I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time...Prices, as we know, will either move up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance.” - Reminiscences of a Stock Operator