Hagopian's Rule

01/12/10 11:42:51 AM

by Alan R. Northam

Alan Hall Andrews was made famous by his invention of the Andrews pitchfork. However, there were many other technical analysis tools that he developed and used in his own trading. One tool that worked so well that he added it to his own arsenal of technical analysis tools was the Hagopian rule.

Security: !COMP
Position: N/A

Figure 1 is the monthly chart of the NASDAQ Composite Index. This chart shows the long-term trend of the NASDAQ. The first thing Alan Andrews did when looking at a new chart was to identify the significant pivot points. These significant pivot points have been identified and labeled P0, P1, and P2 on the chart. Andrews noted that a trend was typically made up of five significant pivot points. Two of these significant pivot points in the downtrend have so far been developed and identified. Andrews did not include pivot point P0 in this count. This leaves three significant pivot points yet to be developed before the downward trend can be considered complete.

FIGURE 1: !COMP, MONTHLY. See the Andrews pitchfork and the Hagopian line.

Graphic provided by: AmiBroker.com.

After identifying the significant pivot points, Andrews would then draw his famous pitchfork as shown in Figure 1. Andrews noted in his studies that 80% of the time price would move down to the median line (ML) of his pitchfork before reversing directions. However, he also noted that there were times when price would not make it to the median line before reversing directions; he called this a price failure.

Andrews further noted through his studies that when a price failure occurred it often indicated a significant reversal would carry price much further than it did on its approach to the median line. This then suggests that there is a high probability for price to exceed its late 2007 high. The official call for a price reversal was more involved than just noting that price failed to reach the median line, however. To complete the price failure analysis Andrews would wait to see if price broke out above its upper parallel line; labeled U-MLH on the chart. If a breakout occurred Andrews would then draw a Sliding Horizontal line off the high of the break out bar as shown on the chart. If price then subsequently broke out above the Sliding Horizontal line within two to three days, as on the chart of Figure 1, a price failure was officially called.

Another method used to determine a price failure and the probability that price would move significantly higher is called the Hagopian rule. The Hagopian rule was developed by a student of Andrews and it worked so well that Andrews included it in his own studies. The Hagopian rule states that when price reverses its trend before reaching a line at which a high probability indicates such a reversal could take place, a buy or sell signal was given when price crossed the first trendline that sloped away from the median line. This first line that slopes away from the median line is called the Hagopian line and is drawn and labeled in Figure 1.

In conclusion, price has now moved above the sliding horizontal line, signaling a price failure has occurred and that price will now move significantly further than it did on its approach to the median line, further suggesting a probability that price will move above the late 2007 high. In addition, if price now moves above the Hagopian line, a buy signal is generated and is also an indication that price has much further to go on the upside. However, the probability for higher prices is negated if price fails to break out above the Hagopian line. Therefore, it is important to wait the crossing of the Hagopian line to confirm that a price failure has occurred and prices are ready to move significantly higher.

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.