Monthly Archives: October 2015

Average Directional Indicator – ADX

WHY ADX?

At any one time a market will be doing one of two things: trending or consolidating. A trader’s approach needs to be different to each type of market. If trend following systems could avoid the whipsaws of a consolidating market, then unnecessary losses can be avoided.

ADX offers a solution. It helps identify which type of market is current.

HOW IT IS CALCULATED

Welles Wilder developed the concept of directional movement in 1978. Directional movement compares two trading periods (usually daily, but it may be used on all time frames).

If price moves higher, the difference between the highs is positive directional movement (+DM). If price moves lower, the difference between the lows is negative directional movement (-DM). Inside days do not result in overall directional movement and so are ignored. Outside days take the larger movement only. The figure below illustrates the idea graphically:

adx

A moving average of +DM and -DM is calculated; the standard time frame is 14 days. This creates the +DX and -DX lines in the ADX indicator.

The +DX and -DX lines can be used in (at least) two ways. Whichever is uppermost indicates the direction of the trend; if the +DX line is above the -DX line the trend is up and vice versa.

When the DX lines cross a potential trend change is signalled. When a market moves from trending to consolidating the DX lines will come close together and fluctuate about each other.

The ADX line (normally black and more solid) is the difference between the two DMs divided by the total of the two DMs. Thus if price is moving strongly in one direction, the numerator will be larger than if price were not moving strongly in one direction:

adx-formula-new

ADX is bound between 0 and 100. Generally, high and increasing levels indicate a trending market and low and falling levels indicate a consolidating market.

HOW TO USE IT

There are no commonly agreed upon rules, so it is up to each individual trader to test their own rules to determine which approach fits their trading style and preferred market. Below some guidelines are offered as a starting point.

From Dahlquist and Kirkpatrick, “Technical Analysis”:

These general rules for using ADX were originally provided by Ashwani Gujral.

When ADX is rising and at a level:

– Between 15 and 25: Beginning of trending; use trending indicators
– Between 25 and 45: Definite trending; use trending indicators
– At 45 or above: Overextended; watch for trend turning point; use price or indicator patterns

When ADX is declining and at a level:

– Below 20: Low volatility; very short swings; no trend; use oscillators
– Between 20 and 30: Consolidation; use oscillators
– Between 30 and 45: Correction from extreme likely; use patterns; trending indicators

Ruggerio offers the following rules which are a little different (from Kaufman, “Trading Systems and Methods”):

1. If ADX crosses above 25 the market is trending.
2. If ADX crosses below 20 the market is consolidating
3. If ADX crosses below 45 after being higher, the market is consolidating.
4. If ADX rises above 10 on 3 of 4 days after being lower, the market will start to trend.
5. A trend based on rule 4 remains in effect until the 5 day difference in the ADX is less than zero.

LIMITATIONS

Because ADX and +DX and -DX are based on moving averages of +DM and -DM, it suffers from the effect of lag that all moving average systems have. The standard period to average is 14 days, so a new trend will not be indicated until well into the first two weeks of it.

References: Kaufan, P. Trading Systems and Methods; Kirkpatrick, C and Dahlquist, J. Technical Analysis: The Complete Resource For Financial Market Technicians; Pring, M. Technical Analysis Explained.

GOLD Elliott Wave Technical Analysis – 30th October, 2015

More downwards movement was expected for all wave counts.

Targets were inadequate, but price did move lower and remained below the invalidation point which was close by.

Continue reading GOLD Elliott Wave Technical Analysis – 30th October, 2015

GOLD Elliott Wave Technical Analysis – 29th October, 2015

In the short term, a little upwards movement was expected to 1,164 or 1,171 (with the higher target at 1,171 favoured). Thereafter, more downwards movement was expected.

Upwards movement ended at 1,162.79 and was followed by downwards movement.

Continue reading GOLD Elliott Wave Technical Analysis – 29th October, 2015

GOLD Elliott Wave Technical Analysis – 28th October, 2015

Downwards movement was expected, but price breached the invalidation point on the hourly chart first providing much confusion with the wave count.

Continue reading GOLD Elliott Wave Technical Analysis – 28th October, 2015

GOLD Elliott Wave Technical Analysis – 27th October, 2015

Downwards movement was expected, but price has moved mostly sideways to complete a small green candlestick.

Continue reading GOLD Elliott Wave Technical Analysis – 27th October, 2015

US OIL Elliott Wave Technical Analysis – 26th October, 2015

Downwards movement was expected.

The session for 21st October provided confirmation of a trend change when it clearly breached the channel.

Continue reading US OIL Elliott Wave Technical Analysis – 26th October, 2015

GOLD Elliott Wave Technical Analysis – 26th October, 2015

Downwards movement was expected.

Price moved lower, but slowly, to complete a small red doji.

Continue reading GOLD Elliott Wave Technical Analysis – 26th October, 2015

GOLD Elliott Wave Technical Analysis – 23rd October, 2015

Price whipsawed taking out both invalidation points and providing more confusion, not clarity.

Continue reading GOLD Elliott Wave Technical Analysis – 23rd October, 2015

GOLD Elliott Wave Technical Analysis – 22nd October, 2015

Again, upwards movement was expected but did not happen.

Price moved slightly lower to make a new low just 1.2 below the prior day’s low and complete a small red doji.

Continue reading GOLD Elliott Wave Technical Analysis – 22nd October, 2015

GOLD Elliott Wave Technical Analysis – 21st October, 2015

Upwards movement was expected. This is not what happened.

The invalidation point on the hourly chart was breached by unexpected downwards movement.

Continue reading GOLD Elliott Wave Technical Analysis – 21st October, 2015

NZDUSD Elliott Wave Technical Analysis – 21st October, 2015

Elliott wave and traditional technical analysis of NZDUSD.

New updates to this analysis are in bold.

ELLIOTT WAVE COUNT

NZDUSD monthly 2015
Click chart to enlarge.

Primary 3 should end when RSI indicates oversold and most likely not before. Currently RSI has returned just above oversold.

Primary 3 would reach 2.618 the length of primary 1 at 0.49809. The structure of primary 3 is incomplete.

NZDUSD daily 2015
Click chart to enlarge.

Within intermediate wave (3), minor waves 1, 2, 3 and now most likely 4 are all complete.

There is no Fibonacci ratio between minor waves 3 and 1.

At 0.6184 minor wave 5 would reach equality in length with minor wave 1. At 0.60604 intermediate wave (3) would reach 1.618 the length of intermediate wave (1). This gives a rather large 120 pip target zone. When there is more structure within minor wave 5 (specifically when minute waves i through to iv are complete), then the target calculation may be added to at a third degree. At that stage, the goal will be to narrow the target range.

Minor waves 2 and 4 exhibit alternation: minor wave 2 was a deeper double zigzag and minor wave 4 is a more shallow flat.

The channel is drawn using Elliott’s technique. In this instance it appears so far to be working well to show where minor wave 4 has most likely ended. If price throws back to the upper edge of the trend line and finds resistance again about there, then the strength of the line would be reinforced and may then be more reliable.

The invalidation point is the start of minor wave 5 at 0.68977. If minor wave 5 has begun, then no second wave correction within it may move beyond its start. If the invalidation point is breached, the analysis is wrong. It may be minor wave 4 is continuing further.

The invalidation point is close by at this time, although this wave count is not confirmed. If the upper trend line holds, then this wave count indicates potentially a good risk / reward ratio.

TECHNICAL ANALYSIS

NZDUSD Technical Analysis 2015
Click chart to enlarge. Chart courtesy of StockCharts.com.

ADX still indicates an upwards trend is intact. The upwards sloping bright aqua blue trend line supporting this last rise in price has not been breached. The bright blue line needs to be breached for more confidence in the Elliott wave count.

ADX tends to be a lagging indicator. By the time it shows a new downwards trend that trend may be about halfway through, if the target is where it may end for a relatively short fifth wave.

The 21 day EMA seems to work reasonably well for the Kiwi. It may assist to show where price finds resistance. The Elliott wave count now expects price to move below the 21 day EMA. If that happens, it would provide further confidence in the wave count.

During the last correction it was a downwards day which has strongest volume. This is some small support for the Elliott wave count which expects a downwards wave to follow.