From the July 01, 2011 issue of Futures Magazine • Subscribe!

Taking pitchfork analysis to the next level

Applying ADX

Many traders use the ADX indicator to determine the strength of an underlying trend. That may work well on a daily or weekly basis, but the ADX does not work well on intraday trends.

To determine the underlying strength of a trend on an hourly time frame or smaller, it may be helpful to think of the median channels as a flowing river. Bodies of water flow into larger bodies of water because they follow the path of least resistance. Median channels work much the same way. Think of the zones on either side of the mid-line as the path of least resistance. In a bull move, the zone north of the mid-line will have greater relative strength than the zone south of the mid line. In a downtrend, it is just the opposite. This may seem obvious, but take away the pitchfork entirely and you couldn’t tell the difference.

A good example of determining the strength of an intraday pattern can be seen in a recent pullback phase in the biotechnology sector index (BTK) (see "Bio break," below). In the initial phase, the pattern is attracted to the lower, weaker zone of the bearish median channel. After a couple of retests over the next month, the pattern finally spends the majority of the time in the upper portion of the channel. The downtrend is not confirmed over until it breaks out of the channel. Behavior leading up to the breakout can be viewed as an advance warning or indicator of what is to come. That is a warning that a bearish sequence is not going to be sustainable.

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