In the late 1950s, Axelrod's interest in neurotransmitter hormones led him to study the pineal gland, the tiny gland often called the "third eye" due to its central placement deep in the middle of the brain. Prior to that time, scientists did not understand what the pineal did or how it worked. In 1917, Carey Pratt McCord and Floyd Pierpont Allen demonstrated that when the pineal gland was crushed and added to water, tadpoles released in the water would lighten significantly in color, a phenomenon that defied explanation at the time. Sustained research on the pineal did not pick up again until the 1950s, when Mark Altschule and Julian Kitay at Harvard Medical School correlated the presence, or absence, of pineal gland extract with the weight of rats' ovaries. In 1958, Aaron B. Lerner at Yale University isolated the hormone produced by the pineal and named it melatonin. In 1961, Virginia Fiske at Wellesley College argued that light had an effect on pineal weight in rats, and that these lighting changes seemed to affect their sexual desire.

In 1959, Axelrod initiated a series of investigations using rat pineals to explain the gland's important role. Axelrod and his laboratory assistant Herbert Weissbach reported that melatonin is actually the neurotransmitter serotonin that has undergone a chemical conversion, and is stored along with norepinephrine in nerve terminals for later release. This conversion helped to explain why, in McCord's experiments, crushed pineals lightened the tadpole's skin: the melatonin in the water caused the tadpoles' melanophores (surface pigmentation cells) to contract, thus lightening the color of the amphibians' skin. In 1962, Axelrod and Richard J. Wurtman discovered that melatonin functions as a powerful neurotransmitter when released through the central nervous system, and that melatonin enables the pineal to act as a kind of "biological clock." From these findings, Axelrod and Wurtman proposed what they called in 1965 the "melatonin hypothesis": melatonin, they argued, was secreted in response to changes in environmental lighting, and that these changes affected not only the pineal but also reproductive functions in mammals.

Working in 1964 with Solomon H. Snyder, Axelrod proved that serotonin was necessary for maintaining the sleep cycles of rats. Since rat pineals release large amounts of serotonin around 12 P.M., and decrease production by 12 A.M., Axelrod concluded that the pineal gland is a kind of "relay station" for serotonin in transit in the nervous system. The pineal regulates the release and distribution of serotonin in 12-hour cycles. These cycles of serotonin secretion define what scientists call the body's "circadian rhythms." These are the natural rhythms that regulate the body's internal mechanisms for rest and sleep, and continue unabated whether or not the body is exposed to morning daylight or plunged into nighttime darkness.

In 1965, Axelrod and Wurtman published a detailed study of the pineal gland for lay audiences in Scientific American. By the late 1960s, Axelrod began to identify the role of the pineal gland as it related to signal transduction, the theory of cellular communication introduced by NIH molecular biochemist Martin Rodbell after 1969. [For more about the origins of signal transduction, see Rodbell, Signal Transduction and the Discovery of G-Proteins, 1969-1980, at the Rodbell exhibit site]. Axelrod applied signal transduction theory to his own research on the metabolic function of serotonin and described the pineal as a "neurochemical transducer" in a 1974 issue of Science.