Andrews' Pitchfork: Drawing, adjusting and interpreting this trend channel tool (Part 2)

Support, Resistance & Reversal

Pitchfork trend lines can provide support or resistance. In an uptrend, the lower trend line acts as support to define the overall trend, the upper trend line acts as resistance and the median line defines the strength of the trend. Prices should reach the median line on a regular basis during an uptrend. Failure to reach this line shows underlying weakness that could foreshadow a trend reversal. Chart 5 shows Ciena (CIEN) moving higher within a rising Pitchfork. Notice how the lower trend line offers support and the median line offers resistance. Even though Ciena met resistance at the median line throughout the uptrend, it managed to reach this line on a regular basis to affirm the uptrend. Failure to reach the median line would have shown underlying weakness. CIEN broke the lower trend line with a sharp decline in November. Notice that this break held as the trend line then turned into resistance.

Chart 5 - Andrews Pitchfork

Chart 6 shows CSX Corp (CSX) with a pair of corrections identified by Andrews' Pitchfork. Notice that both corrections formed after sharp advances. For the first correction, it was possible to draw Andrews' Pitchfork after the early July high. Notice that prices did not break the median line in late July. Also notice that prices held above the median line in August. This showed strength that led to a breakout in September. It was possible to draw the second correction after the early December high. Prices did move below the median line, but soon recovered and CSX broke resistance with a surge in January.

Chart 6 - Andrews Pitchfork

Trigger Lines

Andrews' Pitchfork also incorporates the use of trigger lines, which are essentially trend lines that originate at point 1. Upper trigger lines extend down from point 1 through the peak at point 3. A break above the upper trigger line is a buy signal. Lower trigger lines extend up from point 1 through the trough of point 2. A break below the lower trigger line acts as a sell signal. Chart 7 shows Rowan Companies (RDC) with a lower trigger line extending up from the July low and an upper trigger line extending down from the November high. These trigger lines are similar to normal trend lines drawn off two reaction highs or reaction lows. Their signals are often much later than the signals generated by Pitchfork breaks.

Chart 7 - Andrews Pitchfork

Conclusions

The steepness of the Pitchfork channel depends on the placement of the three drawing points, in particular point 1, which is the start of the median line. Even though point one usually starts with a reaction high or low, it is sometimes necessary to adjust point 1 to insure a realistic price channel. Unfortunately, there are no hard rules for point placement. Instead, chartists must use judgment and experience when drawing channels. This is where the subjective nature of technical analysis comes into play. As with most aspects of technical analysis, it is important to build experience by experimenting with Andrews' Pitchfork. See what works and what does not work first hand. This is the only real way to master an indicator.

So that was it for Andrew's Pitchfork. Hope you all like it!

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Tuesday, 17 October 2017

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