Abet Chichi2

[4Godnwv]

TA Education, understanding ADX (Part 2):

Here's a link to Part 1 for those who need it:
http://www.investorshub.com/boards/read_msg.asp?message_id=1610314

Part 2

The positive directional indicator [+DI] represents the strength of an up move, while the negative directional indicator [-DI] depicts the strength of a down move. A more usable interpretation would be +DI = buyers and -DI = sellers, although some have questioned this interpretation.

When combined with the ADX this indicator can give us a picture of both the current trend and the strength of that trend. It can also generate BUY and SELL signals when the +DI moves above or below the -DI.

Remember, an ADX decline below 40 would signify a weakening trend, while a rise above 20 would suggest a strengthening trend.

Let's look again at our chart:
http://stockcharts.com/def/servlet/SC.web?c=$COMPQ,uu[h,a]daclyyay[db][pb50!d20,2!f][vc60][iUl14!Ua1....

Notice that the green +DI indicator crosses the red -DI indicator on the 13th of August, generating a BUY signal. Notice also that the black ADX line is below 20. For the next few weeks the ADX line climbs (showing trend strength). A look at the candles tells us that the trend is up.

Now here is where things get interesting. On Sept. 25th a SELL signal is generated, followed by another BUY signal on the 2nd of Oct. A saavy trader however, would see something of even greater significance. Notice than the green +DI line reaches well above 40 in early Sept., yet it only reaches the high 30's in mid-October.

If we think of +DI as buyers and -DI as sellers it becomes clear then even though the stock (in this case an index) is moving up, it is doing so with less strength (or less interested buyers).

If you drew a line diagonally from the high (of the green +DI)in early Sept. to the high in mid-Oct. that line would be slanting downward. However if you drew a diagonal line along the tops of the candles during the same period, that line would be slanting upward. So, we have negative divergence on the +DI, negative divergence on the ADX, and higher highs on the candles. This is a recipe for a pullback.

By the way the MACD on our chart is showing a negative divergence as well, but we can get into that some other time.

Bottom line. Our ADX (+DI & -DI) indicator is showing us to get out...downturn is dead ahead!

In conclusion, the ADX shows the strength of a trend (though not the direction of the trend) and the +DI shows the strength of the upward movements and -DI shows the strength of downward movements. Crossing +/- DI's generate BUY and SELL signals. Finally positve or negative divergence, when measured against the trend, can help identify trend reversals. Pretty powerful indicator!

Blessings,
4God