ADX(14 period), -DI +DI (optional) with 20 period EMA, Bollinger Bands, RSI (9 period) and OBV (candlesticks also optional)
With the earning plays the selection process is based on fundamentals FIRST then on technicals like the ADX. So the 'engine' is stock before its earnings report or a pre-breakout stage for a watch list stock. The "accelerator" is ADX and/or the complete Directional Movement Indicator (with or without the +DI and -DI). When the momentum of stock wans the ADX falls below 20. But I use either a Bollinger Band with a 20 period Exponential Moving Average moved 2 standard deviations for determining the trend as well.
You will notice that even when a stock starts to go down the ADX will stay up longer allowing for the stock to 'recover' without triggering a sell signal. You have an RSI plotted below that and an OBV below the RSI.. I use a 9 unit RSI but you can use a 10 or 14 unit. If the ADX fall below 20, more than likely you will see confirmation in the RSI falling as well (stochastics have too many whipsaws to use).
As long as the ADX is above 20 you can and should let profits ride especially if the stock is riding on the upper bollinger band. Remember that the ADX is just there to determine the TREND of the stock and the Bollinger band with its moving average will also be letting you know if your stock is still in an uptrend.
All the time your stock is ABOVE the 20 period exponential moving average (the center line of the Bollinger Band) you are okay even if the stock moves below the upper band.. You don't want to sell if the stock will only end up retracing its earlier gains and if you watch the ADX and its still higher than 20 (or 30) you will most likely see the stock does indeed retrace its earlier gains.
So when do you sell? You can't use the ADX to determine the sell exactly because you will be left with a stock that falls quicker than the ADX falls. What you do is watch the MOVING AVERAGE first. It is more than likely that while the stock drops the ADX will still be UP but you can allow the stock to drop a bit below its 20 period EMA.. as long as the ADX is okay the stock could bounce back off the 20 period EMA and recover. If the stock falls more than just a small amount of a bar below the EMA, chances are the ADX will start to move down at this point, but even if it doesn't the oscillator will probably slope down and fall below its center line. That fall of the RSI (or ROC) and the drop below the 20 day EMA would signal a sell.. and if you are using -DI and +DI than the crossover will also trigger, but I've stopped using the DI's for most trades.
A drop of the ADX alone can not be a sell signal because it falls even when the price is just consolidating and doesn't necessarily fall when the stock is dropping. But a fall of the ADX could signify that there is only a consolidation on its way and not necessarily a sell (a confirmation of course with the 20 period EMA and RSI wlll let you know if you are just consolidating or something more serious is going on if the stock falls below the 20 period EMA by more than a small portion of a bar and the RSI goes down you are not consolidating but dropping)..
In fact some of the best 'holds'and breakouts are when the ADX is like a dead snake lying on the bottom, because when the dead snake rises the stock could be getting out of consolidation (trading range) back into a trend after a breakout. So a low ADX can paradoxically signify a possible imminent trend change to the positive (like the chart of VRTY before its breakout last week) when its actually below 20.
Actually most of the time you will find that the stock is trading around its 20 day EMA and is then in a consolidation phase. Here Not always is a stock trending but just in a trading range even intraday. Here is where the little trendlines you draw come in handy. Eventually the stock will stop consolidating and break out once again, hopefully in the direction from where it was before (a continuation of the trend).. you will be able to chart some bull flags or rectangles on the top and bottom of the trading range.
At this point the +DI and -DI will react in most cases pretty quickly and if an end to the consolidation occurs the +DI will cross the -DI..
So its not enough for the ADX to be down to trigger a sell.. there has to be a confirmation that indeed there is a 'downtrend' coming and the breakout of consolidation is to the downside. First draw little trendlines (ascending, descending, symmetrical triangles, and/or bear or bull flags)
If your stocks starts to break out out as a reversal of the previous trend.. again the oscillator which takes over the job from the ADX will let you know which direction the break out will - be.. So they work in tandem. The +DI and -DI of course will cross before the ADX moves appreciably and that will give you a sell signal, and a confirmation from the oscillators.. but eventually you will be able to do without the + and - DI and use the ADX, the 20 period EMA, bollinger and just the RSI..
Once your stock is consolidating it is in the 'hands of the oscillators' because the oscillators are used when a stock is in a trading range to determine when the stock breaks out once again into a trend. So basically every indicator has a function and its not just a perfect world where stocks are always in a clear uptrend or even downtrend.. So an ADX that goes under 20 is not sufficient to sell. The sell signal would have to be determined by a fall below the 20 period EMA, a fall in OBV and a downturn of the RSI (or a crossover of -DI over the +DI).
I never use an intraday chart in a 'vacuum' without a 6 month weekly or daily chart nearby. On this longer term chart are the drawn trendlines and approximate entry level.
I'll be reprinting this post with charts from some of my latest trades so it won't be so dry, probably tomorrow, but since you asked tonight this should do temporarily. |
