WHAT’S HAPPENING?
It seems that not everyone can see red and green. That means a chart like the ADX is meaningless. I have now labeled ADX chart #40.2 in MY CHARTS so that everyone should be able to tell what’s happening. I have re-posted the chart below with the corrections.
The red limit line is on the top of the chart and the green limit line is on the bottom. The dotted lines are like a warning track. Anyone that can’t see the lines properly should be able to backtrack a line from a previous note to see what’s happening. I’ll try to remember to make notes on this chart but I may forget and occasionally I’ll forget to watch this chart (it’s a 60 minute chart) and suddenly, it’s screaming “LOOK OUT” when I wasn’t looking.
Presently the ADX is warning of a correction, but we haven’t gotten the conclusive breakaway move from the limit zone. Presently the SP futures are trading up a couple of points.
The black ADX line is approaching the red limit line but it’s not a threat at this time.
04-29-12 ADX DAILY
Chart #40.2 is also an example of the 5 day EMA mechanical buy/sell method. In the notes below #40.2, I have posted the following:
“‘This is the best simple trend-following indicator we tested against daily DJIA data. Substituting 5-days for 120-days in the same formula (above), and starting with $100 and reinvesting profits, total net profits for this 5-day EMA Crossover Strategy would have been $16 billion, assuming a fully invested strategy, reinvestment of profits, no transactions costs and no taxes. This would have been 78 million percent better than buy-and-hold. Short selling would have been profitable.’ quote per Robert Colby.
I have modified the 5 day into a 35 hour EMA. This was done due to volatility issues (gaps) that occur in today’s markets. Trading the SP futures (nearly 24 hours/day) can minimize gaps but not completely. To avoid sleepless nights, there are trading algorithms available with certain online brokerages that can execute this trade automatically (method not suitable otherwise).
When the trend is obvious, stay with the trend (trend is your friend, blah, blah, blah). You may have to learn to ignore small penetrations of the 35 hour EMA or trade the penetrations. Trading means a lot of trades on ‘small corrections’. If you live with small penetrations, you MUST establish a maximum percentage penetration in order to not be caught in a trend reversal. It’s up to you how you want to implement this method.
The ADX lines can help avoid ‘some’ whipsaws.
Watch for the following:
- A warning occurs when the less volatile black line is near or has penetrated the red/green limit lines. When the black line is near or beyond a limit line, this is indicative of an extreme level and a contra-move should take place.
- A buy or sell signal from the green +DI or red -DI lines occurs when these lines approach or cross the red or green limit lines. The rule is: The approach of similar colored lines is bullish; The approach of dissimilar colored lines is bearish.
- You MUST wait for the +DI or red -DI lines to reverse direction to validate the signal. This is also true for the black line too.
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