From the June 01, 2011 issue of Futures Magazine • Subscribe!

Andrews' pitchforks and the price failure rule

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 (see "Counter action").

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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.

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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.

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