Welles Wilder’s Average Directional Index ( more commonly known as just, ADX) is a fairly common tool in many market technicians toolbox. It is used to measure the strength of a trend, no matter if the trend is rising or falling. If you want to know more about ADX click here.
Something I had never measured/looked at was the actual level of the + and – DI lines (the green and red lines on the chart). The usual method of using this indicator has been based on the black line and it’s rising and falling as well as the crossover of the +DI and -DI lines. However, last night I noticed when the -DI line breaks above 40 the market has put in a short-term bottom. At yesterday’s close the -DI printed 40.95 when plotted for the S&P 500. As always I’ve marked past occurrences in green dot lines, I wouldn’t want any of you to strain yourselves.
So is this a sign to take out a second mortgage and buy out-of-the money calls on SPY? No. It’s simply one indicator that is telling us the current equity rubber band has become overly stretched and at some point will need to revert.
Disclaimer: Everything in this post is meant for educational and entertainment purposes only. Do not construe anything written in this post or blog as a recommendation, advice, or an offer to buy or sell any securities. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
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