Traders & Investors Club

On the attached weekly chart of the S&P500 index, we have plotted an Andrews Pitchfork, together with Fibonacci Retracement and Projection levels.

The Andrews Pitchfork is constructed by identifying three significant swing points on our chart. If plotting a bullish pitchfork, there will be two swing lows and a swing high. If plotting a bearish pitchfork, there will be two swing highs and a swing low.

Our first swing point is call the Base. It is identified on the attached chart as point A. We now connect swing points B and C with a straight line and identify the midpoint of this line. Now we draw a line from point A through the midpoint of BC. This line is called the Middle Line. Next, we draw two lines parallel to the Middle Line from points B and C. These lines are called the Upper Parallel Line and the Lower Parallel Line. The Andrews Pitchfork is now plotted on our chart.

In a trending market, price action is usually contained between the Middle Line and either the Upper or the Lower Parallel Line. We look for a reversal whenever the price reaches any of the three lines. If the price breaks through the Middle Line, we look for it to reach the opposite parallel line.

If the price breaks through one of the parallel lines, it signifies a possible change in trend. In order to plot a potential price target, another parallel line may be plotted below the Lower Parallel Line (or above the Upper Parallel Line) equal to the distance between the Lower Parallel Line and the Middle Line. This is called the Lower Extended Line.

We have plotted our Fibonacci levels on the S&P500 chart from the significant swing low at point A to the swing high at point B. As you can see, we had a classic retracement to the 61.8% Fib level before the trend resumed. It is interesting to note that the 161.8% Fibonacci Projection level coincides with the 2007 top. In conjunction with the top trendline of the Megaphone Pattern discussed elsewhere on the site, we have a high probability zone for a major top followed by a severe market reversal.

In the meantime, if momentum happens to come out of the market prematurely and we see a couple of weekly closes outside the Lower Parallel Line, then the top will be in.

Watch out below!

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