When the ADX goes flat
Cho Sing Kum
1st
Jan 2003
Let me first wish you a happy, healthy
and prosperous New Year.
The Directional Movement Index is a trend indicator with the added
advantage of being able to identify trending and non-trending market. It
is the only trend indicator that can do this. I will not go into the
details of this indicator but briefly, it consists of three lines – the
DI+, the DI- and the ADX. When the ADX is rising, there is a trend.
Whether this is an uptrend or a downtrend is identified by whichever is
the stronger; the DI+ or the DI-. When DI+ is above DI-, it is uptrend
while when DI- is above DI+ is downtrend, but only when ADX is rising.
While studying this indicator in 1983, I noticed a particular behavior.
This is the ADX going flat (after having risen signifying the birth of a
new trend).Having observed this in many more occurrences, I come to accept
this as a potential entry opportunity in the direction of the new trend.
Of course as in all indicators, this is not 100% perfect but its
reliability level is quite good, at least for me.
What is this showing then?
Fig 1 is the monthly chart of Asia Pacific Breweries. (Singapore stocks
tend not to have much liquidity so using the daily chart is not advisable.
For this reason, I prefer to analyze the weekly and the monthly charts
instead.) Notice that the ADX is flat since July after having risen from
the beginning of 2002 to confirm an uptrend (DI+ above DI-). During the
six months when the ADX is flat, price is in a corrective decline. The
Slow Stochastic declines in parallel with price and this is where the
entry potential is about to happen. The Parabolic and the 20-month Moving
Average help to support the view that the Directional Movement Index’s
uptrend reading is still intact.
The Slow Stochastic has just crossed and is turning up. Used in this
combination, I take this as a reading that while in an uptrend price has
just about finishes its corrective pullback and is ready to resume in the
direction of the trend. The confirmation of this is when the ADX turns up
again. Let’s see what happen.
Note: In the original formula, the Direction Movement Index is calculated
without decimals for all three lines. This observation will not work
otherwise.
Note:
Click here to read the follow up article, When
the ADX goes flat - Part II
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