When a Downtrend Becomes Overextended: Clues from the ADX

Interesting to note that the 14-day ADX for the S&P500 tagged the 40 level on Tuesday, an extreme reading from a historical perspective (see long-term chart). ADX gauges the strength of the underlying trend. A reading of 40 or higher indicates an unusually persistent trend, and when it coincides with a downtrend (-DI over +DI), it often means the downtrend is nearing an end on an intermediate-term basis. This isn’t a precise indicator of a bottom, as there’s frequently further downside after the initial 40+ reading. Nor is it an indication of a significant long-term bottom. But extreme ADX readings have been a good indication that the downtrend is nearing an intermediate-term exhaustion point. The result is usually a higher S&P one month later. The last thirty instances in which the SPX 14-day ADX hit 40 or higher (when the -DI component was greater than +DI) are listed in the table below (-DI & +DI are components of the ADX indicator. When +DI is above -DI, the trend is considered positive, when it’s below the trend is negative). Note that in 26 out of 30 cases, or 87% of the time, the S&P was trading at a higher level one month later, significantly above the 58% at-any-time odds. In only one case was the S&P down 4%+ one month later, while it gained 4%+ eleven times…

14-day ADX for S&P500 Hits 40 In Downtrend
05/25/10… S&P500 ??? one month later
03/05/09… S&P500 +22.2% one month later
10/09/08… S&P500 -0.6% one month later (*)
07/10/08… S&P500 +1.0% one month later
07/17/02… S&P500 +1.5% one month later
09/20/01… S&P500 +8.5% one month later
03/21/01… S&P500 +11.7% one month later
10/18/00… S&P500 +3.6% one month later
08/28/98… S&P500 +2.1% one month later
12/11/96… S&P500 +2.5% one month later
07/30/96… S&P500 +4.9% one month later
05/11/94… S&P500 +3.7% one month later
04/05/94… S&P500 +0.8% one month later
09/21/90… S&P500 +0.4% one month later
08/17/90… S&P500 -3.1% one month later (*)
12/01/87… S&P500 +6.9% one month later
10/23/87… S&P500 -2.5% one month later (*)
04/04/86… S&P500 +2.7% one month later
06/13/85… S&P500 +4.3% one month later
02/23/84… S&P500 +1.6% one month later
09/18/81… S&P500 +2.5% one month later
03/26/80… S&P500 +5.8% one month later
10/29/79… S&P500 +5.6% one month later
09/05/79… S&P500 +3.0% one month later
11/08/78… S&P500 +2.8% one month later
12/03/73… S&P500 +4.0% one month later
12/20/72… S&P500 +2.0% one month later
08/10/71… S&P500 +8.3% one month later
05/01/70… S&P500 -6.0% one month later (*)
12/11/69… S&P500 +1.3% one month later
07/25/69… S&P500 +4.2% one month later

Categories : Archived EOD Commentary, End-of-Day Commentary

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