the bottom is in!, page-15

Congratulations on you success with BLY BuyNHold, it was also one of my favorites to trade around that time.

A good screen filter to use to find these stocks such as BLY is the Directional movement System, Part of the DMS is the ADX indicator. (the DMS is a lagging indicator and im not fond of its common useage) however.

The ADX is often referred to as a Trend Strength indicator, but what it really does is measure the rate of price expansion in a given direction, i.e if the Day range/bar range is expanding over time the ADX will be moving higher, if the bar range is contracting over time the ADX will be decreasing. This makes is a awesome gauge of the rate of momentum, and gives hints to how sustainable that momentum is.

As I mentioned above in one of my posts, further the price deviates in one direction away from a mean price, greater the probability of reversal becomes.(I often use the 8EMA as a gauge of short term mean price).

As the ADX is a measure of price expansion, we can use it to find Price expansion which has become unsustainable at the given rate, no stock falls in a straight line, there will always be trade able re-actions to the action, the re-action is relative to prior action in size. Every re-action has the potential to lead to a full blown reversal.

From my experience a ADX (14) reading over 50 indicates a very high probability of reversal because this is measure of extreme price expansion which is unlikely to be sustainable going forward, price blow offs often occur around this reading, uptrends and downtrends often become exhausted between readings of 40-50

So getting back to screening , if DM- is above DM+ (i.e a downtrend) and the ADX is reading above 40, we can place these stocks on watch and start looking for signs of a bottom or reversal.

You wont find many of this stocks at the moment, but its a good screen to use when the markets getting hammered to filter out the strong downtrends which are close to becoming exhausted, further confirmation is of course required, sorry if this is a little off topic, please let me know if this bothers anyone, if so Ill re-frame from these type of posts.

Cheers