Monday, April 12, 2010

A Reliable Indicator.

Welles Wilder was a brilliant market technician who contributed greatly to the development of technical analysis. He is most famous for the famed RSI, but he also developed the Average Directional Index (ADX),which measures the strength of a prevailing trend and whether movement exists in the market. Although it should not be used as a 'trigger' in executing trades , the pivoting of the ADX line at extremes ( 35 and 15) is often coincident with a significant market turn. The ADX should only be used to anticipate a trend change when the ADX is greater than both+DI and -DI (when above 35) and below both +DI and -DI when generating an indication from a 'tough'.(when below 15) The peaking ADX is a more reliable indicator than the potential pivot indication from the 'tough' position.
click chart for larger image



The ADX is currently at 32.44--slightly below the 35 threshold but it is setting itself up for a sell pivot in classic fashion. As the market continues to rally--possibly into the 1218-1223 level on the S&P--the ADX should be monitored closely. A turn of the ADX line from an extreme is an excellent piece of evidence to use in conjunction with a 'trigger' to initiate or exit a trade.

3 comments:

forex-cat said...

Your article is always useful.
Thanks.

Fibocycle said...

thank you forex-cat

jk said...

I also great fan of ADX, but there is some chucking in ADX. ADX with RSI & MACD are very useful to avoid whipsaw. I am active in INDIAN STOCK market. Also having blog on market. http://www.moneydriveslife.blogspot.com