Monday, 14 June 2010

11:21 BST - Andrew's Pitchfork

This chart may be worth watching. It shows the rally from March 2009 in SPX with the Andrew's Pitchfork overlayed.

SPX Arithmetic Scale Pitchfork:

I only have a basic understanding of this tool, but essentially, its usefulness seems to be in relation to a market that appears to be moving in a channel.

The basic lines are the median line and the x1 line - all in blue on the chart. I've added additional lines based on fib numbers, as identified on the chart.

I believe the theory is that in a trend, price should move to the median line of the fork and should gravitate around there while the trend is intact. Once price breaks the median line and fails to get back to it, that may signal the end of the trend. 

You can see on the chart how price 

1) reached the median line during April 2009;
2) broke above it at the start of May and found support there during May;
3) broke down through it in June but then broke back above it in July;
4) subsequently stayed above the median line until 22 January 2010;
5) again, recovered and traded back up through the median line until 27 April 2010;
6) rallied towards, but failed to quite reach, the median line on 29 April;
7) rallied following the 6 May crash, but failed to get anywhere near the median line;
8) declined below the lower x1 line of the fork following the rally into 12 May;
8) climbed back into the fork with the post 25 May rally; and
9) broke down through it again with the decline into 8 June.  

According to my rudimentary understanding, the early sign of the end of the trend came with the failure of the rally into 29 April to reach the median line. The next sign was the failure of the rally into 12 May to do so also. 

Having broken the lower line of the fork, price is now trying to get back into it again. I assume that a failure to recover it would be very bearish. Of course, there's nothing to stop it from starting a new up trend with the rally off the 8 June low and, therefore, creating a new fork within which it will channel. 

Well, as I said, I'm no expert on this tool and the above is just my interpretation of the picture shown on the chart. My primary focus will remain the Elliott Wave count - but I'll just keep an eye on this for future reference!