The Pitchfork: Silver Traders' Best Tool

03/14/2011 11:56 am EST

Focus: COMMODITIES

Silver's red-hot rally continues, and one trader shows how he's using Median Lines-also called a pitchfork-to discern key levels an predict future price movement.

By Greg Harmon

Silver has been rising steadily since the end of January. It is now trading over 30-year highs and keeps going. How can you determine where it might end or stall from a technical perspective? Following oscillators and indicators that can flash overbought but remain at that state for a very long time before any correction doesn't help much. But there are many tools to help estimate the extent of a move. You could use Fibonacci extensions, Elliott Wave rules, measured moves, Bollinger band breaches, or you pull a new tool from the shed: The Andrews pitchfork.

Below is a chart for the iShares Silver Trust (SLV). (The same analysis can be used for silver futures and is shown at the end of the article.) The Andrews pitchfork is prominent in blue on the chart. The two outer tines, known as the upper and lower Median Lines, mark the support and resistance. Those together with the center tine, which is the Median Line, mark the channel. As price clears one Median Line, Andrews claimed it was attracted like a magnet to the next one. Often, traders who use the pitchfork layer multiple pitchforks as trends reverse, but there is no opportunity for that on silver yet.

chart
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From this chart, the price has fallen from the middle of the upper Median Line toward the Median Line. Today, it got pushed toward the Median Line but held at the rising trend line in brown. As that trend line pushes price through the middle of the channel, the price should then become attracted to the upper Median Line. Following the second brown trend line from the beginning of the initial move from August and extending it higher, we can estimate the first point where price might hit the upper Median Line at $38.25.

The second brown trend will cross the upper Median Line at $40.25. This puts a target for the move higher, given the price holds the first trend line during this consolidation. Should the price fall through the trend line, then it could drive to the Median Line between $33.50 and $35.25. This is the equivalent to a range from a straight fall from the trend to the Median Line a continued sideways movement from earlier in the week to meet it. When and if it drives through the Median Line, look to the lower Median Line for the next target.

The chart below for continuous contract silver futures has the same pitchfork and trend lines as SLV. The target range for silver futures to hit the upper Median Line is between 39 and 41. The target range for a move back to the Median Line is 34.25 to 36, using the same methodology.

chart
Click to Enlarge

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By Greg Harmon of DragonFlyCap.com

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