Andrews Pitchfork Tool Use

Stocks & Commodities V13 (473-477): Support and Resistance with the Andrews Pitchfork by B. Barbara Star, S

BASIC TECHNIQUES

Support And Resistance With The Andrews Pitchfork

Here's a charting technique that's available in most of today's popular software. If you're y ou're not familiar with it, here are some tips to using it. i t. If you are familiar with it, it's time for a refresher. by Bar bar a Star, Sta r, Ph. D

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very technical analyst recognizes the importance of identifying support and resistance areas on price charts.

Early in the history of technical analysis, Alan Andrews developed one such technique, which he called the median line method . The median line method calls for drawing a line from a high or low price level through the median price of a subsequent corrective rally or decline and once that is done, adding parallel lines above and below the median line from the corrective highs and lows. This results in three lines: a long center line (the median line), an upper channel line and a lower channel line. Each line defines potential support or resistance. Because of the shape it makes on a price chart, the median line method soon became known as the Andrews pitchfork . The long center median line resembles a handle, while the two shorter parallel lines are the tines of the pitchfork (Figure 1). Most charting software today includes the Andrews pitchfork among their technical studies, but it's easy enough to construct manually on price charts.

FIGURE 1: ANDREWS PITCHFORK APPLIED TO THE DJIA. The Andrews median lines became known as the Andrews pitchfork because of the shape it makes on the price chart.

CONSTRUCTING THE PITCHFORK To build an Andrews pitchfork requires selecting three price pivot points. A pivot point is any price level from which price either turns up from a downtrend or down from an uptrend. These pivot points may be significant highs or lows, but they can also be smaller high and low turning points that occur within a larger price trend.

Prices rarely rise without one or more corrective declines along the way and, by the same token, seldom fall without one or more corrective rallies. According to Andrews, the high and low prices of the corrective declines and rallies are price pivot points that provide two of the three cornerstones needed for creating the pitchfork. The third cornerstone is a prior high or low price turning point that begins the handle of the pitchfork. The handle of the pitchfork intersects the median or middle of the price range between the corrective price high and price low. With rising prices select a low point, a high point and another low point (Figure 2). With declining prices choose a high Copyright (c) Technical Analysis Inc.


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FIGURE 2: BOEING AIRCRAFT WITH ANDREWS PITCHFORK. Constructing the Andrews pitchfork requires locating three pivot points. In a rising market, find a low price point, a high price point and another low price point.



FIGURE 3: IBM WITH ANDREWS PITCHFORK. In a declining market, construct the pitchfork by selecting a high point, a low point and another high point.

The median line is the key: Drawing the median line provides the basis for this approach. Figure 4 illustrates this process with the December 1994 gold futures contract as prices moved up into September and then declined into December.

The first step is to locate two turning points on a price chart. In Figure 4, these are labeled B and C. The next step is to find the median point between these two points. The median point is the average price level that falls between the high of point B and the low of point C. Simply add the high price at B to the low price at C and divide by two to determine the median point.



FIGURE 4: CONSTRUCTING THE MEDIAN LINE. The median line is constructed by finding the midpoint of a corrective decline or rally. The midpoint at letter X is the average of the high and low between points B and C. A line connects the price at letter X to a previous anchor pivot point (point A) and extends it into the future.

In mid-September 1994, the rise in gold prices was interrupted by a four-day corrective decline. The high at point B was 396.90, while the low of the correction at point C was 390.60. The sum of those prices is 787.50. Divide that by 2 and the median price would be 393.75. While gold prices were generally dropping from late September to early December, a corrective rally occurred during November. The low price reached prior to the brief rally at point B was 383.10, while the high of the rally at point C was 387.90. The sum is 771, which, when divided by 2, yields a median point of 385.50. The median price point would be plotted as a dot on the price chart and labeled X in Figure 4. Because it takes two points to draw a line, the median price point needs to be anchored to another pivot point. Andrews uses a previous price low in a rising market or an earlier price high in a declining market as an anchor pivot point. This is labeled "A" in Figure 4. A straight line can then be drawn from pivot A to median point X and extended into the future. The median line now divides the corrective price range into two equal parts. To draw the tines: To complete the pitchfork, draw two more lines, one from the original corrective pivot high and the other from the original pivot low that parallels the median line extension to the right. Figure 5 labels these lines as "D" and "E."



FIGURE 5: ADDING THE PARALLEL CHANNEL LINES. The tines of the pitchfork are labeled lines D and E. They begin at the corrective price high and low and parallel the angle of ascent or descent of the median line.

SELECTING THE PIVOT POINTS Whether constructed manually or by computer, which pivot points should be used? Some traders draw a pitchfork formation after every price correction. However, that can create some confusing and unreliable lines that either calls for an end to a trade prematurely or are at too steep an angle to contain the price action. Better results occur using weekly charts to determine intermediate pivot points. Transfer the weekly pivot points to the daily price chart, which is the way I established the pitchfork location in Figure 1. Intraday traders can use pivot points derived from end-of-day charts.

The Andrews pitchfork is most helpful in identifying changes in the short to intermediate trend. Using daily price data, I prefer to wait until first, a potential trend has established itself by a successful retest of a price low or high; second, a subsequent corrective move in the trend makes it necessary either to adjust a conventional trendline down in an uptrend or up in a downtrend; and third, prices resume in the direction of the trend. This approach is illustrated in Figure 6 to show how I selected the pivot points from which to draw the pitchfork on the December 1994 gold chart presented in Figures 4 and 5. The retest of advancing prices from the low in August occurred on August 29; that enabled me to draw an initial trendline from point 1 to point 2. The trendline angle was carried forward until it was broken in September.



FIGURE 6: LOCATING PIVOT POINTS ON DECEMBER 1994 GOLD. One method to select the appropriate pivot point is to draw a normal trendline from point 1 to point 2. Extend the trendline until a price correction forces a change of its original angle (point 3). Use the prices at point 2, point B and point 3 to construct the pitchfork formation.

I waited until the price again rose above point B before I numbered the September low as point 3. That low necessitated a downward adjustment in the initial trendline†, which I labeled adjusted trendline . Point 2 became the anchor point for the pitchfork formation, the price at B the high pivot point and price at point 3 the low pivot point. The upward pitchfork is shown in Figure 5. The lower pitchfork support line (that is, line E) broke closer to the September price high than the traditional adjusted trendline would have been. Once the lower support line was taken out, I waited for a retest of the September high to make sure the trend had changed. That retest occurred in October (point 2 in Figure 6) and permitted a downward trendline that extended from the highs at points 1 and 2. The price broke above the initial downward trendline in November. After waiting until the price broke below point B, it was possible to adjust the trendline upward at point 3. The downward pitchfork formation was plotted from the point 2 retest high, the pivot low at B, and the high at point 3. In December, the upper line of the pitchfork was broken as prices began to rise. Bollinger bands provide a similar method for selecting pivot points. At some point in a price trend, a correction takes price from a high or low Bollinger band† to the opposite band. The price high and low of that move are used as two of the three points needed to create a median line. The price level from which the current trending move began is the third pivot point. Figure 7 illustrates this technique with Snapple Beverage (SNPL). An uptrend began in late November 1993 that kept prices above the middle Bollinger band. In January and February 1994, a decline took prices from the upper band to the lower band. The pitchfork points were placed at the November low, the January high and the February low. In early March 1994, prices broke below the lower pitchfork support line, signaling a possible change in trend. Prices remained below the middle band until late March, when a rally moved prices from the lower band to near the upper one. At that point, a downward pitchfork was drawn using the February high, the March low and the early April high. The price penetrated the upper pitchfork channel line, signaling a change in trend, as the stock moved Copyright (c) Technical Analysis Inc.


g er nto May.

FIGURE 7: SNAPPLE BEVERAGE WITH BOLLINGER BANDS AND ANDREWS PITCHFORKS. Another method for selecting pitchfork pivot points is a price move from one Bollinger band to the opposite band during a trending move. The solid line shows an upward pitchfork formation and the dashed lines show a downward pitchfork formation.

TRADING WITH A PITCHFORK Once an Andrews pitchfork has been drawn, there are several ways that traders can use it. The most obvious way is to locate price support and resistance. In general, prices should remain within the upper and lower channel lines. In an uptrending market, a break of the lower line suggests that support has been broken; in a downtrending market, penetration of the upper channel line suggests a burst through resistance. The breaks above and below the channel lines produce changes in the short to intermediate trend.

Sometimes in an uptrending market, price breaks above its upper channel line or, in a downtrending market, falls below its lower channel line. When that happens, it is time either to redraw the pitchfork to better reflect the angle of ascent or to exit when price breaks the median channel line. The lines of the pitchfork offer the added benefit of locating potential price reversal points. Expect market tops to occur at the middle line or between the middle line and the upper channel line and market bottoms to occur at the middle line or between the middle line and lower channel line. The median line often serves as a place where price makes a temporary reversal. The price tends to return to the midpoint 80% of time; after the price breaks through the median line, expect it to return to there. Reversals at the median line are good places to enter, re-enter or add positions. The four panels in Figure 8 illustrate some of these concepts with July 1995 crude oil. Panel A shows the initial pitchfork formation that was drawn after the February-March correction and a resumption of the uptrend as prices Copyright (c) Technical Analysis Inc.


gappe a ove t e res stance o t e Fe ruary g . Pr ces move up strong y enoug n pr to ta e cru e o a ove the upper pitchfork channel line (panel B). Because the pitchfork no longer contained prices, it was time to consider taking profits if prices broke below the median line. However, while price moved down toward the median line, the line was not violated and prices reversed to the upside. At that point it was a good time to redraw the pitchfork using the March low as the anchor and the correction that took price from above the upper channel line toward the median line. The new pitchfork formation is seen in panel C.

FIGURE 8: JULY 1995 CRUDE OIL WITH ANDREWS PITCHFORK. The four panels illustrate both the need to periodically adjust the pitchfork formation so that it reflects price action more accurately as well as the importance of the median line and upper/lower channel lines as price reversal points.

Prices remained within the channel lines throughout April and into May, when it topped near the upper channel line (panel D). Prices fell to the lower channel line, then rallied toward the median line before breaking the lower channel line in May. That marked the beginning of a decline. Use confirming indicators: Despite its usefulness, the pitchfork is by no means a "set it and forget it" analytic tool. There is an art to selecting the appropriate pivot points. The pitchfork is best used in conjunction with other indicators to confirm price tops or bottoms. Momentum oscillators as well as overbought/oversold indicators seem to work well with the Andrews pitchfork.

Figure 9 illustrates the confirmation principle with one such indicator, a price rate of change (ROC), which is found in most charting software. The ROC oscillates above and below a zero line as it plots the percentage of price change over the last x number of days. In this case, it tracks the percentage of price change over the past 12 days. Often, it will signal a loss of price momentum by diverging with price at tops and bottoms. In Figure 9 (July 1995 crude oil), the pitchfork is positioned as it was in panel D of Figure 8. As price was nearing the upper pitchfork channel line in early May, the ROC produced a bearish divergence at the price top that warned of a momentum loss. The ROC crossed its zero line as price broke through the lower channel line of the pitchfork formation. The confirmation Copyright (c) Technical Analysis Inc.


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FIGURE 9: JULY 1995 CRUDE OIL WITH ROC AND ANDREWS PITCHFORK. Mo men tu m indicators, such as the 12-unit price rate of change shown, can act as a filter to confirm potential trend changes.

Given the proliferation of technical indicators in recent years, the Andrews pitchfork may seem too unsophisticated for today's traders. Once it is understood and used in conjunction with more current technology, however, the Andrews pitchfork can enhance trading results. Barbara Star is a university professor and part-time trader. She leads a MetaStock support group and is vice president of the Market Analysts of Southern California. Her publications include the EZ Indicator series for use with the MetaStock program.

REFERENCES, RESOURCES, READING French, Thomas E. [1985]. "Median line market analysis," Technical Analysis of STOCKS & COMMODITIES, Volume 3: February/March.

Jaenisch, Ron (1989). "Can you draw a straight line?" Technical Analysis of STOCKS & COMMODITIES, Volume 7: December. _____ [1987]. "An after-Christmas story," Technical Analysis of STOCKS & COMMODITIES, Volume 5: April.

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Andrews Pitchfork Tool Use

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