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Some tools in technical analysis appear so simple that they are dismissed by most after a cursory glance. ‘Andrew's pitchfork' is one such tool that does not receive the attention that it deserves. This technical tool was developed by Dr Andrews in 1960s.
Dr Andrews was greatly influenced by the works of Sir Isaac Newton and he believed that Newton's third law of motion — every action has an equal and opposite reaction — can be applied to economic cycles and stock markets. Dr Andrews went on to teach the greatly popular ‘action reaction course'.
The median lines technique, now known as Andrew's pitchfork, is one of the techniques taught as a part of this course.
To construct the Andrew's pitchfork, three points need to be identified. The first, or point ‘A' would be a significant trough (in case of a chart that is trending upward) to the left of the chart.
The second point or point ‘B' would be a peak that occurs subsequently and the point ‘C' would be the trough that occurs immediately after point B. Next, a line should be drawn from point A passing through the mid point between B and C.
This is the median line. Two lines are drawn parallel to the median line taking B and C as the reference points.
The pattern resembles a farmer's pitchfork and hence the name.
To draw a pitchfork on a stock that is trending downwards identify a peak on the left of the chart and then take a subsequent trough and peak as points B and points C. The interpretation of this tool is similar to the interpretation of trend lines and trend channels.
Prices tend to gravitate towards the median line and the lower and upper parallel lines provide the supports and resistances. Once the price moves beyond the pitchfork, it would be either a trend reversal or a sharp change in the gradient of the slope. The superiority of this tool stems from the fact that it uses the first leg of a move to project the range between which the price will move in future. The supports and resistances provided by the lower and upper parallels are very useful in projecting price targets.
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