Following the median line to profit

Following the median line to profit

Dologa, Mircea

Andrews’ Pitchfork offers an elegant approach to price trend detection on any level of analysis, from five-minute to weekly.

Andrews’ PitchFork is a technical analysis tool designed to channel the chaos of the markets into an organized flow of prices. It was first taught in the 1960s, by Alan Andrews, under the concept of what he termed the “median line” (ML).

This tool is one of the most efficient for the trader’s toolbox. It takes into consideration not only price and time, but also the velocity and the momentum of the market along the prevailing trend’s slope. In this way, the price targets are revealed.

Along with the ML, the trader is provided with the lower/higher median line (MLH), warning lines (WL), trigger lines (TL), the sliding parallel line (PH) and gap median lines. All of these become clear as the pitchfork technique is applied.

Indeed, the phenomena of multiple pitchforks (major or minor) provide a huge advantage in trading decisions. By observing the market flow, it’s obvious how the preceding pitchfork forebodes the next one, and the major one guides the minor ones. This clarifies the terrain of the market and provides a solid grasp of the projected advantages for the next day.

The first pitchfork formation shown in “Stick a fork in it” (right) gives us a good opportunity to observe the movement of prices along the ML. We can see that price trends higher along the ML about 80% of the time, ending wave C on Jan. 19, 2005. It bounces toward the lower MLH, dancing comfortably along it for a couple of bars, and finally breaches out. As “Down the pike” (right) shows, this pitchfork feeds into the next downward oriented one after the price breaks the lower TL.

This is a promising time to enter a short trade. Good trade placement would be at the bar’s close beneath the lower MLH with a stop loss above the prior bar’s high plus three points (one Dax point is euro25, about $30). The crossover of the three exponential moving averages (8-, 13- and 21-bar) agrees with the decision to go short.

A 45-degree downward slope of the impulsive pattern implies a strong downtrend is in place. The False Stochastics tool (here applied using the calculations from eSignal) confirms the inception of a downtrend, with a crossover occurring in the oversold zone. This tool becomes very ergonomie and prolific because it can be used to help identify the inception, continuation, termination and reversal of price movement.

Once the major price points (P0, Pl and P2) along the second pitchfork are established, the price rallies to the upper MLH and to the first WL, ricocheting all the way down to the Fibonacci level at the 23.6% mark. The move heading south is channeled between the upper MLH and the WL, being attracted like a magnet toward the ML of the second pitchfork.

Once the ML level is reached, we may say the impulse pattern is complete and we can be reasonably sure the correction has begun.

RETRACING THE MOVE

The correction pattern is typically made up of three waves contained in an ABC pattern, where wave A is mostly an impulse wave of five sub-waves, wave B is formed of three waves and wave C has the same structure as wave A.

Most of the time, this correction move is between 38.2% and 61.8% of the prior pattern. If it breaks the 78.6% and 88.6% levels, chances are it will be heading toward 100% and up to 127%.

The trader should practice drawing four levels of warning lines, in case of a normally developed trend (around 21 bars). But, in case of an extended move (more than 21 bars, reaching 34 or 55 bars), the common sense implores us to add as many warning lines as needed. In the cases shown here, six warning lines are drawn. The last two lines exercise a bouncing resistance, sending the price into a down steep trend.

Curious enough, the first six WL levels served as a ladder to the end of the correction pattern (wave C end). We obtained a triple top in this zone, with highs centered on the fourth WL, announced well in advance by the stochastics divergence.

The ensuing high-steamed upward move pierced the upper MLH of the second pitchfork, then the upper TL, and is on its way to the top, entering the median zone of the third pitchfork.

The reversal-stimulating factors we originally observed, namely the crossover of the stochastics in an oversold zone and the crossover of the three EMAs, confirmed the inception of the uptrend, which will navigate dynamically through a narrow channel of 21 bars, a sign of a highly powered momentum. Its 45-degree slope is steep, foretelling a strong trend that reaches a 62% correction of the prior impulse pattern.

ON THE UPSWING

The narrow channel guides the price to the ML of the third pitchfork, which acts as a price magnet about 80% of the time. Once the reversal is done, the price generates the first movement into the fourth formation, with an anchor just above its ML, and then the fifth pitchfork, which is a price bounce on the lower MLH.

Testing several times the guidelines of the fourth pitchfork, price finally decided to reverse to just a point above the lower MLH of the latter pitchfork, almost touching it. Once strong support ensured, the price took off like a speeding freight train. Only two huge bars were needed to reach the higher TL. But the buyers weren’t there, so the reversal was imminent.

Once the down swing low was completed at the low of wave 2 (the downward oriented sub wave C of wave 2 on Jan. 27, 2005), the most recent pitchfork was formed. As would be expected, the magnet of its ML worked, and the price elevated, almost touching the ML.

The price movement is halted momentarily by the confluence of significant resistance, forming a strong virtual price wall:

1. Upper TL of the fourth pitchfork,

2. ML of the fifth pitchfork,

3. WL of the sixth pitchfork,

4- Price resistance level of 4245,

5. Lower line of the Fibonacci (38.2%) median zone of the third pitchfork,

6. The 78.6% Fibonacci level of the whole prior swing.

Globally seen, throughout several days, the right side of the 60-minute chart, starting on Jan. 24, 2005, represents a correction of the prior impulse pattern formed by two swings with the third on its way.

The first swing lasted 48 hours and formed the Wl/A waves, looking like an impulsive pattern. The second swing, a corrective-looking pattern W2/B, represented the retracement of the first swing, lasting one day and a half. The third swing, just starting on the eighth hourly bar of Jan. 27, 2005, immediately halted at the 4245 level right into the day’s close.

Given this, we should expect prices to continue moving at least 100% of Wl/A (in case of a corrective wave C) or even more to 162% of Wl/A (in case of an impulsive wave W3), thus giving it the impulse pattern status.

BY DR. MIRCEA DOLOGA

Dr. Mircea Dologa is a commodity trading advisor who founded a teaching concept for novice and experienced traders. E-mail: mircdologa@yahoo.com.

Copyright Futures Magazine Group Dec 2005

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