Today was one of my least favorite types of trading days. Even after the market closed I couldn’t find many reasonable examples of Fibonacci measurements and trendlines. As I watch the market gradually move upward, I depend on my trading signals to keep me out of trouble. If the pullbacks are too small to give good pivots, I won’t get many.

Falling ADX

It’s on a day like this that I look at the Average Directional Movement (ADX) indicator. Normally I keep it hidden on my computer screen, because for my kind of trading its trend indications are often too late. But it can help in deciding what kind of market you are working with.

The ADX shows a trending market when it is rising, but it makes no comment on whether the trend is up or down. A good trending market will have a constantly rising ADX, and you can see that occurring following yesterday’s breakout. It shows a market with good momentum.

But when the ADX gets into the 60 range, it is giving a caution signal, showing that the market is quite extended. The market closed yesterday with a reading of 65. What was worse, today the ADX trended down for most of the day. That doesn’t mean price has to come down, but it does show that momentum is decreasing.

Often this means consolidation, which in turn means trading reversals or relatively short moves. But other times it just means a slow rise or fall. Teresa Lo used to call these “grinding trends.” And I know I can’t trade them. But there is no rule that says I have to.