Pitchfork Analysis And The Price Failure Rule - Hagopian’s rule.
Those who have studied Alan H. Andrews’ trading techniques in depth know that he taught ways to anticipate a change in market sentiment — a change that often results in a price move that catches many traders by surprise.
Andrews’ best-known technique is Andrews’ pitchfork, found on most charting software programs. Andrews’ pitchfork consists of three parallel lines identifying recent trends. Two of the lines form what appear to be prongs, while the third forms a handle, thus, the “pitchfork” descriptor. The lines are drawn across support and resistance pivots that identify recent trends.
A question often arises regarding pivot selection for Andrews’ pitchfork—that is, identifying what three sets of pivots would be the best to use in any given situation. Here is how Andrews addressed that question: “Usually, it seems best to start with the most recent three alternate pivots of the time frame you are interested in. That will give you the current view. But don’t stop there, because any three alternate pivots can be used, and no matter which set is chosen, each resulting pitchfork will add something to the outlook as it tells its own story.”
One part of the pitchfork story is the price failure rule. The logic for this technique is grounded in one of Andrews’ best-known quotes.
“Someone once remarked that most traders spend a good deal of their time following the markets to see what prices are doing,” he said at a trading seminar. “I suggest they would be better off if they spent more time observing what prices are not doing.”
The price failure rule is a core Andrews technique that deals directly with what prices are not doing. It comes into play when prices don’t reach the median line, or the middle line of the pitchfork. Before we look at the technique, let’s first consider the broader interpretation of price action vs. the median line.
Price magnet
The median line technique is Andrews’ best-known work. Indeed, it is the basis for the Andrews’ pitchfork method itself. The primary feature, according to Andrews, is the high probability that prices will reach a median line and then reverse.
That aspect is pretty well known among users. Less known is that the Andrews’ pitchfork offers a great deal more than that.
The discovery of this phenomenon prompted Andrews to develop complementary techniques that would help confirm the outlook of trade positions already on the books, or alert him to a potential shift in market sentiment as prices interacted with the median line. The price failure rule is one of
those techniques.
To deal with those times when prices change direction before reaching the median line, Andrews developed a special method called the price failure rule. It is an easy-to-use procedure that prepares the trader for a trend change when new buying or selling interest appears to be surfacing in a stock or commodity.
The rule relates to Andrews’ comment regarding the importance of observing what prices are not doing — in this case, not continuing to press on until the median line is reached. Failure to reach the median line raises a couple of interesting side issues: One, market sentiment is more than likely changing; and two, it is not unusual to see a large counter-move take place following a price failure.
PRICE FAILURE
The chart shows prices steadily moving lower after the pitchfork was drawn, well on the way to the median line. An Andrews trader, bearing in mind his observation that prices will reach a median line more often than not, would have had good reason to look for prices to continue the move down to the 108 area. That outlook would have been less clear, however, when prices reversed and, in so doing, penetrated the upper parallel line of the pitchfork. That was a warning that a price failure was likely and called for Hagopian’s rule, a trendline adaptation Andrews named after one of his early students.
Hagopian’s rule
Here’s how Andrews described the rule: “When prices reverse trend before reaching a line at which probability indicates such a reversal could start, proper action may be taken in buying or selling when prices cross a trendline they were moving along before reversing.”
In “New direction” (below) the pitchfork median line is “the line at which probability indicates such a reversal could start.” The “trendline they were moving along before reversing” is the Hagopian line.
Failure Rule
In this example, the Hagopian line is a downward trendline that was drawn across two previous highs. It slopes away from the median line, which is the preferred arrangement, according to Andrews. In the example, a buy signal was given when prices broke through the Hagopian line, completing the setup for the price failure rule.