ADX is not a 'perfect' indicator, but then, what indicator is? All are abstractions of price, and that's why we should always defer to price first for our analysis.
Granted, given the overall "up" move on the Nasdaq as the parabola completed, ADX sure seemed to give contrary signals. At least on the daily chart, but lets move up our time frame and look at the monthly view:
intelligentspeculator.com
Typically when price action causes ADX to move above 40 with stocks we are on guard. Futures - 40-50. We witnessed many stocks exceeding 60, 70 ADX on daily charts back in 1999/2000. No particular genius was required to guess at the eventual outcome.
So beware - when ADX is 40,50 or higher, the trend - up or down - is likely near exhaustion, and at best a consolidation pattern will set up before a new leg continues in the same direction. At worst, a complete trend reversal is in the offing.
(of course, if one buys the top tick in a strong up trend, even a modest pull back can **feel** like a trend reversal!)
ADX isn't perfect, but its one of the better tools for identifying trend quality. Used in context with price action and multiple time frames, I believe its something worth pulling out from the tool box. |
