ADX Compression in the DIA

Nov 17, 2008: 3:49 PM CST

It’s quite rare to get a reading in the ADX (Average Directional Index) of less than 10, but the DIA 5-minute chart is currently showing compression such that the ADX value is 8.77.  Let’s look at this and see what it might mean.

DIA 5-min chart:

In StockCharts, the ADX actually displays the + and – DMI (Directional Movement Indexes) as the green and red lines in the bottom panel indicator.  Ignore those for a moment and focus on the average, or the Black Line traditionally known as the ADX.

A Low ADX represents market compression, while a high ADX represents market expansion and is based on the principle “Price alternates between range compression and expansion.”

Traditionally, when the ADX is low, we need to be looking for an expansion move to occur, and also we need to avoid using moving averages for trading decision assistance.  Also, we need to eliminate usage of the 3/10 Oscillator because it is giving no discernible reading.  I highlighted that to show that you receive no trading signals off the 3/10 either.

I wanted to highlight the current chart with 30 minutes left in the trading day because I wanted to show a screen cap of this action as it was happening and place up a quick comment.

Basically, in these conditions, traders want to stand aside (not trade) but wait for a breakout of consolidation to enter a trade to play for perhaps a large relative target.  We don’t know which way price will expand, but we can have our guesses.  You might even want to place a bracket order outside the ‘rectangle’ that has formed about the $84 and $85.50 level.  Either way, it’s best not to beat yourself up trading within this narrowing range.

Watch this closely into the close.  Markets can’t stay ‘balanced’ or rangebound for ever.

12 Comments

12 Responses to “ADX Compression in the DIA”

  1. Michael Haltman Says:

    Enjoyed your blog. I found it on BlogBurst where I just got my blog listed. I was a proprietary equity trader for about 15 years (Schonfeld Securities) and used to give training classes on overcoming fear and bypassing emotion. Keep up the good work.

    Mike Haltman
    The Poltical and Financial Markets Commentator
    http://politicsandfinance.blogspot.com

  2. Michael Haltman Says:

    I just noticed Dr. Doug Hirschhorn on the page. He was on staff at Schonfeld and I took two 6 week group sessions that were designed to help get your focus, head and ultimately your trading moving more in the right and positive direction.

  3. Dominick Says:

    Hey Corey, what is the dotted red line just above the 84.0 price leve? Is it to show support/resistance or is it the s-1 pivot point? Also when you calculate your pivots are you using just high, low, close or also the open of the prior day? Thanks for the insight on the compression range you highlighted. I was watching it with interest and simply could not figure out which way it was going so I stayed on the side. It is nice to know you are on the same page with someone of your experiance.

  4. Corey Rosenbloom Says:

    Hey Dominick,

    That line is auto-generated as yesterday’s close by stockcharts.com. I don’t know of a way to place pivot point analysis on stockcharts images. I use pivots as a secondary tool anyway and note confirmation/non-confirmation as price tests one of these levels.

    I’ve learned it’s far easier to predict volatility (range compression/expansion) than direction. That’s why I sometimes do well using strict bracket orders to pull me into a market. That worked well into the close Monday.

  5. Dominick Says:

    Thanks for the reply Corey. It is always appreciated.

  6. Dominick Says:

    Thanks for the reply Corey. It is always appreciated.

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