Technical analysis indicator - Directional Movement Index (DMI)

DMI was designed by Welles Wilder Jr. who also created the popular relative strength index (RSI).

DMI is made up of three lines :
+DI line
-DI line
ADX line

DMI is a “trending indicator” and often used to check if a trend is present and also the strength of the trend. DMI works on all time frames and can be used for any markets eg. stocks, currencies, options, warrants, exchange traded funds, futures and commodities. +DI line basically moves in the same direction as the underlying securities or stock while -DI line moves in opposite direction.

How to use DI lines :
Buy signal is triggered when there is a crossover ie +DI line moves above -DI line and sell signal when +DI line moves below -DI line. The time periods most commonly used are 10 or 14 days. I prefer to use 10 days since the signal can be triggered sooner and can use it to confirm with other indicators.

One must take note that crossovers of the DMI lines alone are often not very reliable because it may provide false signals when market volatility is low ie range bound and late signals when volatility is high ie trending market.

Divergence signal using +DI line :
Divergence occurs when DMI and stock price disagree with one another.
For example when stock price makes a HIGHER high, but the +DMI makes a LOWER high. This is considered as negative divergence and is generally a warning that upward momentum is losing strength and commonly precedes a retracement or reversal. This should be confirmed with other divergence signals eg by look at moving average convergence divergence (MACD).

How to use ADX line :
A rising ADX line means that the market is trending and as such more suitable to use a trend-following system. A falling ADX line indicates a non-trending or range bound market.

Some traders also look for ADX crossover signals. For example, when ADX line moves above 20 or 25 line, it may be an early signal that market momentum maybe gaining. So if the stock price has been moving up past few days, it could mean more potential upside. But if the stock price has been going down, it could mean more potential downside!!

Also when ADX line goes from above 40 line to below it, that could be an early sign that the trend is weakening.

Some suggested ways to use DMI :

1. A good buy signal is triggered when +DI line is above -DI line AND ADX line is in between the two lines.

2. To avoid whipsaw, do not buy when +DI cross -DI for the first time, wait for a pull back. Buy when price moves up again and break the high of the first day when +DI first crossed -DI.

3. Use higher high of +DI to confirm that uptrend is in tact

article by : RooneyYong ( Email )

Singapore Stock Market: Straits Times Index (STI)

Based on Fibonacci Retracement : STI retracing back to support level of around 3320 which coincide with fibonacci retracement level of 61.8%this level is also a 100% retracement level for the recent rebound which started on 22nd NOV Since 3320 coincides with TWO fibo retracement level, this should offer some good support levelof course nothing is 100% certain so have to watch out cos if 3320 level is broken, the next two support levels could be 3249 and 2962Based on Parabolic SAR :this indicator just turned negative two days ago…..not a good sign for nowusually parabolic SAR will stay negative from between 9 to 17 daysBased on multiple moving average (MMA) indicatorsThis is usually a medium to longer term indicator….sad to see that all short term MMA are BELOW long termm MMA so the medium to longer trend is still not good

Some people would say that MMA is a LAGGING indicator. but i dont use this as an “entry” signal but rather to give me a feel of the market so it is still useful for me

Cheers
Rooney

Potential short term technical rebound on the cards :

1. STI reached Fibonacci retracement support level of around 3320 –this level must hold up for market to stage a good technical rebound

2. BOTH STI and Hang Seng showing positive divergence MACD signals and stochastic signals with indicators forming higher lows while indices hit lower lows – this one sign of potential market bottoming, though we must still watch if the latest support level can hold up. For STI case, support would be around 3320 and Hang Seng short term support would be yesterday low of 26400

I must remind that the medium term signals are still WEAK, so not a time to trade in big positions on the long side. Even if I were to trade for the rebound, would nibble on small positions and set my CUT LOSS level TIGHT !!