Andrews Pitchfork Bounce for SP500 Update

Nov 5, 2009: 12:11 PM CST

I’ve been showing different posts on the dominant Andrews Pitchfork tool on the S&P 500, and I wanted to update the chart to show the recent price bounce off the mid-point line which was rather interesting.  Let’s take a look.


(Click for full-size image)

I’m just using the tool in its most basic form above, starting with the November 2008 lows, dragging to the January highs, and then dragging back down to the March 2009 lows to produce the classic pitchfork.

We see that the entire price rally has been roughly contained within the upward sloping angles of the Pitchfork, as seen mainly by the 50% median (midpoint) line and how price has snaked around this level.

You can watch median lines for support or resistance (short term) as seen by the ‘tests’ of this level in both directions.

The most recent shallow retracements have found support just above the 50% line, and on the most recent pullback, price found support almost exactly at the middle line, as it appears price is still going to remain within the upward sloping angle throughout the whole rally.

Look to see if there’s ever a break to the downside of the Median line, currently situated around 1,050 and rising, as that will potentially signal a change in market character just as the upward break from the down-sloping trendline that occurred shortly after I posted the May 13th down-trendline update.

For prior posts and additional insights, see the following S&P 500 updates:

October 19th Andrews Pitchfork Update

July 28th Andrews Pitchfork Update

June 18th Update (a special variation using closing prices instead of spikes)

May 13th showing long-term Down-sloping trendline that was broken which signaled change in trend.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

47 Comments

47 Responses to “Andrews Pitchfork Bounce for SP500 Update”

  1. terlyn Says:

    How does this mesh with the prediction of Elliott Wave theorists? Does this invalidate their prediction, which is an imminent downturn?

  2. Corey Rosenbloom, CMT Says:

    Hey Terry!

    Ultimately, we have to watch price structure as the ultimate arbiter – as they say, “Price is King.”

    As long as we're above the 50% median line and price keeps rising at this steady angle, there will be no downturn. We came close to breaking down beneath it last week but it has so far held as support.

    It's very difficult to see the rally continuing with all the stated negative breadth, volume, and momentum divergences, but still price rises.

    Watch for a break of the 50% line to indicate a change in the character of the market and that could lead to a downturn for sure, but until then, all downside bets seem to be off as the market continues surprisingly to spring bear trap after bear trap..

  3. terlyn Says:

    This is like the rabbit and the duck gestalt picture. Depending on what you focus on, you see a different image. Since volume is not included in the pitchfork, there are no warning signs. When significant selloff happens, the pitchfork would not protect.
    Looking at the S&P market from the March lows to today, you can see a head and shoulders forming. I don't have the pitchfork on my trading platform, but I wonder how it would have analyzed the 1929 crash and afterwards.

  4. Corey Rosenbloom, CMT Says:

    That's a good point! I'll try to go back and do a Pitchfork chart of the 1929 Dow.

    It's more a case of conflicting signals from different indicators and trying to be objective without being biased in an opinion. There's indicators that say we're going up; indicators that say we're about to crash, but a good analyst is one who can look at the gestalt (larger picture) and assess probabilities from that as best as possible.

    From what I can assess, the simple, technical analysis 101 indicators like trendlines, moving averages (and the Pitchfork), are all saying “buy buy buy” and argue for higher prices

    while

    the more complex/advanced technical analysis methods – like divergences, Elliott Wave, overextended rally – tend to suggest lower prices and perhaps sharply lower prices ahead.

    That's what's making it so difficult in my opinion.

  5. terlyn Says:

    I suppose that is the difficulty. Someone I know went to the international technical analyst meeting this year, and half thought the market was going to go up and half thought it was going to go down. That is why I am basically day trading.

  6. Corey Rosenbloom, CMT Says:

    I think in the current market, that's the best solution.

    The goal is not to be right – the goal is to make money.

    So many people feel the market is playing “Musical Chairs” in its overextended condition so that prevents them from going long and understandably so, but that's why I and so many others prefer the intraday frames.

    No overnight risk, can put on larger/leveraged positions, play for smaller, precise targets, can play unbiased (long and short), and it – as strange as it sounds – just is easier right now to do that. There have been some great swings in both directions and plenty of trade set-ups.

  7. Dan de Man Says:

    IMHO Larry Connors RSI2 strategy doesn't work to bad either for short term trades using triggers of 5 and 95

    S&P:
    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&
    GLD:
    http://stockcharts.com/h-sc/ui?s=GLD&p=D&yr=0&m

  8. Dan de Man Says:

    I just wanted to add that if you employ this strategy on a down day, you may want to buy in the last minute or 2 of trading to reduce slippage.

  9. Corey Rosenbloom, CMT Says:

    Nice charts, Dan!

    The RSI 2 oversold signal right now corresponds with gold at the upper Bollinger band forming a doji – a confirming sell signal for sure.

    And on the S&P 500, nice results there it seems.

    Larry's a systematic guy and advocates simplicity and historical testing in trading, which he has done extensively. I have a tendency to overcomplicate or look for too many 'ducks in a row' before trading but we're all different.

    Thanks for the feedback and charts!

  10. terlyn Says:

    Dan, can you explain the strategy briefly?

  11. terlyn Says:

    I get it. So Gold is ready to tank, and the SPX has a little ways to go before it would be in oversold territory. This meshes with the head and shoulders for the SPX and the Elliott Wave for gold, almost. They changed their count to a 5-wave pattern to 1100 because of the recent run-up.

  12. Dan de Man Says:

    Thank you very much Corey :o) We're all in this game together and helping each other out it key.

  13. Corey Rosenbloom, CMT Says:

    That's the key to it! The more we learn and the more eyes we have out to see data/patterns, the better we'll all (hopefully!) be.

  14. Dan de Man Says:

    Hi terlyn,

    Here is a link explaining the strategy:
    http://www.tradingmarkets.com/.site/stocks/comm

    I use trigger of 5 and 95 because it is a safer bet when an index is tanking. Using bbands can also help find extremes. If you are really aggressive you can use it like an oscillator.

    All the best,
    Dan

  15. Dan de Man Says:

    I would not say that Gold is ready to tank. For aggressive short term traders the trade is over. Gold has a habit of dancing around doji after doji frustrating some traders. You also have to compliment this indicator with other indicators such as a 3 10 16 MACD to access the trading environment.

  16. terlyn Says:

    Meanwhile, the UUP suddenly had huge volume and price, which is coming down some. But no reaction in DUG or the markets. I don't get it. I heard that investors are buying calls on UUP and selling puts to hedge their portfolio.

  17. terlyn Says:

    Dan,
    Thanks for your advice.
    Terry

  18. Dan de Man Says:

    I could only guess that some new trader with access to a whole lot of money put in a market order if UDN did not move inversely.

  19. Corey Rosenbloom, CMT Says:

    My gosh I picked up on that while watching Twitter feeds and have already put in a few phone calls to see why that might have happened. Not confirmed with the US Dollar Index futures which was choppy but flat on the session.

  20. terlyn Says:

    Just saw this news, and I bought UUP yesterday:

    NEW YORK (Dow Jones)–Deutsche Bank AG (DB:$72.25,00$1.38,001.95%) (DB, DBK.XE) said Thursday that the PowerShares DB US Dollar Index Bullish Fund (UUP:$22.9400,$0.4300,1.91%) had run out of new shares and wouldn't be able to issue any more until it gets clearance from the Securities and Exchange Commission.
    The move could lead the $822 million exchange-traded fund, which helps investors bet on the U.S. dollar against a basket of foreign currencies, to trade at a price that is substantially higher than its underlying value.
    A number of ETFs that follow commodities like oil and natural gas have also had to suspend issuing new shares amid worries speculators are driving up commodity prices. It wasn't immediately clear why a currency fund would face the same problem.
    -By Ian Salisbury, Dow Jones Newswires; 212-416-2241; ian.salisbury@ dowjones.com
    Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http:// http://www.djnewsplus.com/nae/al?rnd=BaSS0I8sNMINSIhDK.... You can use this link on the day this article is published and the following day.

    (END) Dow Jones Newswires
    11-05-091347ET
    Copyright (c) 2009 Dow Jones & Company, Inc.

  21. terlyn Says:

    Insider Trading: Yesterday, I heard on the radio that investors were buying UUP calls. Now this action today. Here is an article calling it insider trading:

    http://seekingalpha.com/article/171618-insider-

  22. terlyn Says:

    How does this mesh with the prediction of Elliott Wave theorists? Does this invalidate their prediction, which is an imminent downturn?

  23. Corey Rosenbloom, CMT Says:

    Hey Terry!

    Ultimately, we have to watch price structure as the ultimate arbiter – as they say, “Price is King.”

    As long as we're above the 50% median line and price keeps rising at this steady angle, there will be no downturn. We came close to breaking down beneath it last week but it has so far held as support.

    It's very difficult to see the rally continuing with all the stated negative breadth, volume, and momentum divergences, but still price rises.

    Watch for a break of the 50% line to indicate a change in the character of the market and that could lead to a downturn for sure, but until then, all downside bets seem to be off as the market continues surprisingly to spring bear trap after bear trap..

  24. terlyn Says:

    This is like the rabbit and the duck gestalt picture. Depending on what you focus on, you see a different image. Since volume is not included in the pitchfork, there are no warning signs. When significant selloff happens, the pitchfork would not protect.
    Looking at the S&P market from the March lows to today, you can see a head and shoulders forming. I don't have the pitchfork on my trading platform, but I wonder how it would have analyzed the 1929 crash and afterwards.

  25. Corey Rosenbloom, CMT Says:

    That's a good point! I'll try to go back and do a Pitchfork chart of the 1929 Dow.

    It's more a case of conflicting signals from different indicators and trying to be objective without being biased in an opinion. There's indicators that say we're going up; indicators that say we're about to crash, but a good analyst is one who can look at the gestalt (larger picture) and assess probabilities from that as best as possible.

    From what I can assess, the simple, technical analysis 101 indicators like trendlines, moving averages (and the Pitchfork), are all saying “buy buy buy” and argue for higher prices

    while

    the more complex/advanced technical analysis methods – like divergences, Elliott Wave, overextended rally – tend to suggest lower prices and perhaps sharply lower prices ahead.

    That's what's making it so difficult in my opinion.

  26. terlyn Says:

    I suppose that is the difficulty. Someone I know went to the international technical analyst meeting this year, and half thought the market was going to go up and half thought it was going to go down. That is why I am basically day trading.

  27. Corey Rosenbloom, CMT Says:

    I think in the current market, that's the best solution.

    The goal is not to be right – the goal is to make money.

    So many people feel the market is playing “Musical Chairs” in its overextended condition so that prevents them from going long and understandably so, but that's why I and so many others prefer the intraday frames.

    No overnight risk, can put on larger/leveraged positions, play for smaller, precise targets, can play unbiased (long and short), and it – as strange as it sounds – just is easier right now to do that. There have been some great swings in both directions and plenty of trade set-ups.

  28. Dan de Man Says:

    IMHO Larry Connors RSI2 strategy doesn't work to bad either for short term trades using triggers of 5 and 95

    S&P:
    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&
    GLD:
    http://stockcharts.com/h-sc/ui?s=GLD&p=D&yr=0&m

  29. Dan de Man Says:

    I just wanted to add that if you employ this strategy on a down day, you may want to buy in the last minute or 2 of trading to reduce slippage.

  30. Corey Rosenbloom, CMT Says:

    Nice charts, Dan!

    The RSI 2 oversold signal right now corresponds with gold at the upper Bollinger band forming a doji – a confirming sell signal for sure.

    And on the S&P 500, nice results there it seems.

    Larry's a systematic guy and advocates simplicity and historical testing in trading, which he has done extensively. I have a tendency to overcomplicate or look for too many 'ducks in a row' before trading but we're all different.

    Thanks for the feedback and charts!

  31. terlyn Says:

    Dan, can you explain the strategy briefly?

  32. terlyn Says:

    I get it. So Gold is ready to tank, and the SPX has a little ways to go before it would be in oversold territory. This meshes with the head and shoulders for the SPX and the Elliott Wave for gold, almost. They changed their count to a 5-wave pattern to 1100 because of the recent run-up.

  33. Dan de Man Says:

    Thank you very much Corey :o) We're all in this game together and helping each other out it key.

  34. Corey Rosenbloom, CMT Says:

    That's the key to it! The more we learn and the more eyes we have out to see data/patterns, the better we'll all (hopefully!) be.

  35. Dan de Man Says:

    Hi terlyn,

    Here is a link explaining the strategy:
    http://www.tradingmarkets.com/.site/stocks/comm

    I use trigger of 5 and 95 because it is a safer bet when an index is tanking. Using bbands can also help find extremes. If you are really aggressive you can use it like an oscillator.

    All the best,
    Dan

  36. Dan de Man Says:

    I would not say that Gold is ready to tank. For aggressive short term traders the trade is over. Gold has a habit of dancing around doji after doji frustrating some traders. You also have to compliment this indicator with other indicators such as a 3 10 16 MACD to access the trading environment.

  37. terlyn Says:

    Meanwhile, the UUP suddenly had huge volume and price, which is coming down some. But no reaction in DUG or the markets. I don't get it. I heard that investors are buying calls on UUP and selling puts to hedge their portfolio.

  38. terlyn Says:

    Dan,
    Thanks for your advice.
    Terry

  39. Dan de Man Says:

    I could only guess that some new trader with access to a whole lot of money put in a market order if UDN did not move inversely.

  40. Corey Rosenbloom, CMT Says:

    My gosh I picked up on that while watching Twitter feeds and have already put in a few phone calls to see why that might have happened. Not confirmed with the US Dollar Index futures which was choppy but flat on the session.

  41. terlyn Says:

    Just saw this news, and I bought UUP yesterday:

    NEW YORK (Dow Jones)–Deutsche Bank AG (DB:$72.25,00$1.38,001.95%) (DB, DBK.XE) said Thursday that the PowerShares DB US Dollar Index Bullish Fund (UUP:$22.9400,$0.4300,1.91%) had run out of new shares and wouldn't be able to issue any more until it gets clearance from the Securities and Exchange Commission.
    The move could lead the $822 million exchange-traded fund, which helps investors bet on the U.S. dollar against a basket of foreign currencies, to trade at a price that is substantially higher than its underlying value.
    A number of ETFs that follow commodities like oil and natural gas have also had to suspend issuing new shares amid worries speculators are driving up commodity prices. It wasn't immediately clear why a currency fund would face the same problem.
    -By Ian Salisbury, Dow Jones Newswires; 212-416-2241; ian.salisbury@ dowjones.com
    Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http:// http://www.djnewsplus.com/nae/al?rnd=BaSS0I8sNMINSIhDK.... You can use this link on the day this article is published and the following day.

    (END) Dow Jones Newswires
    11-05-091347ET
    Copyright (c) 2009 Dow Jones & Company, Inc.

  42. terlyn Says:

    Insider Trading: Yesterday, I heard on the radio that investors were buying UUP calls. Now this action today. Here is an article calling it insider trading:

    http://seekingalpha.com/article/171618-insider-

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