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Using The Andrews Trendline Technique

01/04/10 09:01:00 AM
by Alan R. Northam

Alan Andrews became famous for the Andrews pitchfork, but he also developed many other trading techniques. One such technique is his unique way of using trendlines. This article uses Andrews' trendline technique to determine the future direction of the Gold Miners exchange traded fund (ETF).

Security:   GDX
Position:   N/A

Alan Hall Andrews is most famous for having created the Andrews pitchfork, but he also developed many other trading techniques that worked so well that he included them in his trading notebook. One such technique was his unique way of using trendlines.

Like Ralph Nelson Elliott, who discovered that after five waves in one direction the market was due to correct, Alan Andrews also used the number 5 in many of his trading techniques. Andrews used the number 5 when drawing his trendlines. He noted that five trendlines normally developed for a market under study in the main direction of the price movement. He observed that when the fifth trendline was broken, a high probability existed that the trend in motion had ended.

One of the problems in drawing trendlines is in drawing them. For years, traders recognized that there was no exact way to draw a trendline as one trader would draw the trendline one way and another trader would draw it another way using the same price chart and the same time frame. Andrews developed a consistent way of drawing trendlines that removed these differences.

To draw his trendlines, Alan Andrews would draw a line from the lowest low, up and to the highest minor low point preceding the highest high without passing through any price points in between. For a downtrend, he would draw a line from the highest high point to the lowest minor high point without passing through any price points in between.

Figure 1 shows how Andrews would have drawn his trendlines on the daily price chart for the Market Vectors Gold Miners exchange traded fund (ETF) (GDX). This chart shows four upward-sloping trendlines. According to Andrews' notes, five trendlines normally develop before a trend is ended. Therefore, according to Andrews' observations, GDX should make one more upward rally with at least one higher minor low so a more steep trendline can be drawn before the upward trend for GDX ends. However, knowing that no trading technique is perfect, a breakdown below trendline 4 would put an early termination on the upward trend for GDX.

FIGURE 1: GDX, DAILY. This chart shows the unique way that Alan Andrews used trendlines to determine when a trend should end. This chart also shows the relative strength index (RSI) below the bar chart.
Graphic provided by: AmiBroker.com.
 
To support Andrews' trendline technique, I have added the relative strength index (RSI) below the price chart. Note that during the complete upward trend that started in October 2008, RSI has remained above its 40% level. As a result, this market sees this level as important. RSI currently looks to be respecting the 40% level, signaling a high probability that GDX will move higher before the upward trend is complete. However, there are no guarantees in trading. So a breakdown of RSI to below 40% would warn that GDX could be ready to move lower and a move by RSI to below 30% would provide some confirmation.

In conclusion, GDX is still in a major upward trend and is expected to make at least one more upward rally before the trend comes to an end. However, a break down below trendline 4 and or a breakdown of RSI below its 40% level would warn that the upward trend for GDX is ready to end.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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