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Upon Further Review: After looking more closely at a few of the historical ADX cases for the NASDAQ, we noticed something “not so bullish” about the NASDAQ’s current ADX line. The text below is from the book Trading For A Living:
When ADX (black line) rallies above both directional lines (red & green), it identifies an overheated market. When ADX turns down from above both Directional lines (red & green), it shows the major trend has stumbled. It is a good time to take profits or partial profits.
As you can see below ADX black is above green and red, which meets the criteria for an overheated market.
When the ADX black line (shown below) is at low levels, it is indicative of a trendless or sleepy market. When the line begins to rise it shows a strengthening trend (up or down). A move from low levels to 51.55 is very rare. We closed at 51.55 on Friday as shown on the current chart below.
Therefore, if ADX black turns down, it probably means we are close to a pullback of some kind.
In the last 31 years, we found only 12 cases where ADX hit 51.55 during the relatively early stages of a new uptrend. In only 2 of the 12 cases was the ADX black line above both the red and green lines. In both cases a short, but sharp, correction of roughly 4% was followed by more gains. A sharper correction materialized within a few months.
