Using ADX to Assess the Risk to the Current Trend

ADX (Average Directional Index) measures trend strength regardless of trend direction. Historically, as depicted below, when ADX peaks near 40, a trend change is increasingly likely.

ADX was developed by Welles Wilder for the commodities market, and does show its imperfections when applied to stocks. Typically, a strong trend is present when ADX is trading over 25 and no trend is present when trading at 20 or below. 

As seen above, ADX is pushing toward another intermediate-term peak near 40. At this level, I would be hesitant to embrace new long positions and protect longs with stops. Some selective shorting would also be in order with protective stops.

Consider using ADX in your arsenal of technical analysis tools.  At the very least, today's level of ADX should encourage traders and investors to be cautious of the uptrend, albeit for a short timeframe as the market consolidates its recent gains.

Learn more about our trend change signals at Baseline Analytics TrendFlex.