Using the ADX indicator for trade signaling and timing


Of all indicators, I have found the ADX to be the most useful

I am often asked about my use of indicators in addition to price patterns. Remember, all indicators are derivatives of price. So, as a general rule my attitude has been why study indicators when I can so directly study price itself.

Yet, there is one indicator that I have found quite reliable for predicting intermediate trends. The indicator is the Average Directional Index. I will not get into how the indicator is calculated. You can Google “ADX” and find this out for yourself.

I start to become especially interested in a market when its ADX reading (14 day) drops below 12. I become doubly interested when the ADX drops 1o or below 10. You should know that ADX readings of 10 and lower are quite rare, often not occuring a single time in a given market in a given year. The ADX indicator is a kind of “compression” reading. Low ADX readings indicate that a pattern congestion has stored a tremendous amount of potential energy.

This reading is an indication that the period of consolidation is likely to end. When combined with classical charting principles, the ADX can be very useful. An ADX set up occurs for me when a 12-week or longer chart pattern is completed just following a period with an ADX at 10 or lower.

We have just such a market set up at the present time. The ADX for Corn is hovering at 10. The ADX does not predict the direction of the trend, only the likelihood of a pending trend.

May Corn is in a 5-month period of congestion. The market exhibits a possible H&S bottom pattern. H&S patterns can signal a move in either direction. In the case of Corn, this pattern could signal an advance (H&S completion) or a decline (H&S failure).

The H&S completion would be signaled by a decisive close above the right and left shoulders. The H&S failure would be signaled by a close below the existing right shoulder low and then the low of the head.

In either case, the ADX indicator would suggest that whatever the direction of the breakout, a sustained trend would be likely. Thus, I am willing to go in either direction with Corn.

Markets: ZC_F


Corn — What do the charts say (getting ready for a BIG move)


Corn is poised to begin a significant trend soon — the question is, “In what direction?”

My experience is that an individual market will offer one to two really quality chart signals each year. When I say quality signal, I mean the following:

  1. A pattern of substantial duration on the weekly and daily charts
  2. A decisive pattern completion
  3. A sustained trend equal to 20% or more of the underlying commodity’s value

Such a situation is forming in Corn. Let’s set the stage.

The weekly chart shows that the full extent of the 21-month triangle bottom completed in Aug 2010 has been played out. There is nothing more to expect to the upside.

The weekly graph shows that the $5.75 to $6.00 level has provided tremendous support — in  June, October and December of 2011. However, each subsequent rally has been less forceful. This chart is a classic display of the descending triangle pattern. Far more often than not, descending triangles are resolved by downward moves. A decisive close below support would establish a price objective of $3.50. That 100% of farmers would object to the prospect of such a move does not make it less likely to occur.

Note that a blow-up of the weekly graph shows that a rectangle has formed in the past five months. It is not unusual for prices to drift sideways during the final phase of a massive descending triangle.

Next, let’s look at the two charts of the July delivery contract. The chart below shows the possibility of a massive 10-month H&S top formation. This pattern REQUIRES a decisive close below the neckline in order to officially be labeled as a H&S top. Until this we are only dealing with possibilities. By the way, this pattern would count to $3.83.


What I find interesting is the period since the October low. If we only take this segment of the chart we can identify a possible 5-month H&S bottom. Importantly, in classical charting we consider a H&S failure to be a significant pattern in and of itself. Thus, whenever we find a H&S bottom (upside bias) we also have the possibility of a H&S bottom failure (downside bias).

So, here is how I plan to play this market. If prices close above the January high I will go long — but my heart will not be in it. My real bias (yes, all discretionary traders, both macro and technical, have biases) is to look to the short side. Corn is grossly overpriced against Soybeans, Wheat and Soybean Meal and it is tough to think bullish on Corn unless a really bullish story can be told for the other grains.

I will nible on the short side if the existing February low is penetrated. I will extend my short position if the January low is violated and I will complete my short line if the December low is taken out.

So, there you have it. All you folks that are dying to fade me, this is your chance.

Markets: $ZC_F, $JJG, $RJA



Gold ready for another up thrust against CHF


Target for Gold (priced in Swiss Francs) is CHF 1840.

The symmetrical triangle on the daily and weekly graphs will be completed by a close today above 1635 CHF/oz. Arguably, the rise above the Feb 2 close at 1613 violates the upper boundary of the triangle. The market is presently trading at 1622.

Markets: $USDCHF, $G6S_F, $GLD, $GC_F


Notice: I need some help from two people

I need help from two people in connection with a lawsuit being filed in federal court against a company that reprinted without permission or my knowledge my original book, “Trading Commodity Futures with Classical Chart Patterns.”

First, I need to obtain a copy of a book from the original printing. Books from this printing did not have a ISBN number on the copyright page. If you have a copy of this version I will swap you an autographed copy from a later printing.

Second, I need to hand deliver some documents to the California Secretary of State’s office at 1500 11th Street, Sacramento. If this location is close to you and you are willing to drop off an envelope for me, please let me know.

If you can help me on either of these matters, please email


A possible H&S bottom in the Euro?


H&S bottom would target 1.3840

I dislike making posts like this because if the analysis herein fails and the Euro heads to 1.2000, inevitably I will receive an email from some reader informing me that he went long on my suggestion and where should he put his stop. Seriously — this really happens.

Yet, the chart possibility is compelling enough for me to present it.

It is POSSIBLE to interpret the the current daily graph as a H&S bottom. This interpretation requires us to use the Dec 21 spike rally as the left shoulder. I think this interpretation would gain credibility if the market can close above 1.3300. The target is 1.3840.

This would not be the first time in recent years that the $EURUSD completed a H&S bottom with a “weak” left shoulder. The chart below shows a similar pattern in 2010. That pattern propelled a substantial advance.

Charting is NOT an exact science. Also, a chart pattern, once completed, does not dictate the future behavior of a market. Charts are organic — they are constantly adding wrinkles and nuances. Also, the failure of a pattern to fully form can be revealing. For example, while the current chart — as of this minute — favors an upside resolution of trend, a close below the neckline would win the inning for the idea of a “failure” pattern and therefore a move back to the January low.

Markets: $EURUSD, $G6E_F



Bottom to Natural Gas at long last


The January low is very likely to hold. Yet, there is no easy way to go long this market due to carrying charges and the premium of the ETFs and deferred futures contracts.

While prices could dip below the 2.300 to 2.500 level again (and if they do futures trades should do somebuying), it is not likely prices would remain there long. In fact, the retest this week may be all we get. The huge spike in volume along with the vertical drop in recent months are characteristic of a market bottom. The problem is that there is no profitable way to play the market. The carrying charges will continue to be a hurdle to playing the market from the long side. Specifically, while nearby Nat Gas futures bottomed at 2.2890 on Jan 23, the Feb 2013 contract is presently trading at 3.6000. Thus, the cash market needs to advance 57% from the Jan 2012 low to keep the Feb 2013 contract from expiring in the red.

The chart below is for UNG, the natural gas ETF. Notice the huge volume spike in the past few weeks. There are about 180 mil shares outstanding in UNG. In the three weeks ending Feb 3 a total of 503 mil shares traded. I believe this  indicates a major change of ownership as several years of buyers finally threw in the towel and commercial interests covered shorts. This type of volume spike is a trademark of major market bottoms and tops. Copare the UNG volume spike to the volume spike at the top in Silver last April.

Yet, the carrying charge structure of the underlying asset (Natural Gas) will make UNG a difficult bet even at these prices .

So, while spot prices have probably hit an important low there is no neat and clean way to buy this market due to the huge carrying charges. However, on retests of the low there is probably little risk in scalping the market from the long side.




The two sides of the Gold coin


Whether you are a bull or a bear I can create a good story for you

[Note: I do not have a position in the precious metals — I could just as likely be long as short in my next Gold trade. I am attempting to present a balanced technical analysis of the Gold charts, not biased by a position.]

I have observed one thing about Gold during the past 35 years — Gold nearly always rings a bell before making a big move. Time and time again I have been too quick fingered and chopped up in Gold by reading too much into the chart and by not patiently allowing the chart to fully mature.

Patience is the name of the game when trading Gold. The Gold market is perhaps the most reliable market of all in forming a significant and recognizable chart pattern before each major price thrust. Waiting for a fully mature pattern is a waiting game.  

There is one other thing about major chart developments in Gold — Gold sets itself up technically to go in either direction when it is time for a big move. And we find the Gold market precisely in this position at the present time. Thus, I will create both the bull and bear chart interpretations for Gold.


The bull market is very much intact, as shown on the quarterly chart. On a quarterly basis the market has made higher highs for 13 consecutive quarters. This string remains intact.

Two things are worthy of note on the daily graph. First, the chart displays a possible continuation “W” pattern, requiring a decisive close above the Nov high. Second, the rally from the late Dec low has been steady with a couple of major bursts. This price behavior is characteristic of the dominant trend. The $44 rally on Jan 25 penetrated the trendine from the Sept high. Bursts through important chart points must be considered as important.


The decline starting last Friday is likely just a retracement of the advance from the Dec low. A decline back toward 1688 would be a buying opportunity. The target of the “W” bottom, once completed, would be $2,085. This target is consistent with the advance suggested by the Gold chart priced in Swiss Francs. A completion of the 4+ month triangle on this chart would establish a target of CHF1860.



There is no question but that the symmetrical triangle in Gold/CHF is exactly the type of pattern that will lead to a sizable move. But, this triangle could just as easily be a 5-point top as it could be a 4-point continuation pattern. A decisive close below the Oct low would confirm a top and establish an initial target of CHF1250. See chart above.

More importantly, rather than forming a continuation “W” pattern, the daily chart could just as likely be forming a massive descending triangle, as shown on the weekly chart below. Note that last week’s bar was a reversal. The objective of this descending triangle would be $1,150, pending a decisive close below $1,490.


Ont thing is for sure, in my mind. Gold does not make huge moves without the suppporting evidence from a mature chart structure. For the first time since the Sept top we have mature chart structures that would support a $400-plus move.

Markets: $GLD, $GC_F



A very special buying opportunity in the Wheat market


The Chicago Wheat market is in a very special situation. The market is poised to rally $1.00 to $1.50 per bushel from present levels.


There are three technical developments worth of note.

First, commercial users have an all-time record net long position of 80,852 contracts representing 404 million bushels while large speculators have an all-time record net short position of 59,383 contracts representing 269 million bushels. The small speculator is also short (21,000+ contracts).

This composition of open interest in and of itself is not does not mean prices will advance. What it does mean, though, is that any advance would feed off itself and overshoot to the upside. If the market develops some upside momentum there will be a mad scramble on the part of speculators to cover shorts.

Second, speculators are short a market that is historically near all-time cheap levels relative to Corn prices. The quarterly chart below tracks the Wheat minus Corn spread back to 1968. Wheat has generally traded between even money and $2.00 over Corn prices. In other words, speculators are record short Wheat in the hole.

Also, the daily chart of the Wheat minus Corn spread displays a textbook symmetrical triangle bottom. This pattern is on the cusp of being completed, although one more decline back toward 10 cents premium to Corn is possible. But, such a pull back would provide the opportunity for excellent profits for traders willing to hold a position for four to six months.

Third, let’s take a look at the daily chart of Mar Wheat. This chart shows that the advance on Dec 22 completed a 5+ month falling wedge pattern.


The retest of this pattern in mid January was very predictable. The following is from Edwards and Magee (5th. edition, page 157):

“When prices break out of a rising wedge they usually fall away rapidly, but when they move out of a fallng wedge they are more apt to drift sideways or in a dull ‘saucering-around’ movement before they begin to rise.”

It is also possible to identify a 4-month H&S bottom on the daily chart (thin line for the neckline). The H&S bottom has a target of 7.74. The falling wedge has a target of 8.33 (the late Aug high).

So, let’s summarize the current Wheat market:

  • Prices have been in a 12-month price slide
  • Speculators have an all-time record short position despite the significant drop in price
  • Commercials (who usually know what they are doing) have an all-time record long positon
  • The price of Wheat is near record lows relative to its biggest competitive grain product (Corn)
  • The charts are showing signs of bottoming

Trading tactics

I think there is a 50/50 chance the H&S pattern is legitimate. If this is the case, then Mar Wheat should hold above the neckline at best and above the Jan 31 low at worst. If the H&S pattern is not a correct, interpretation, then consistent with the behavior of a falling wedge and bottoming characteristics of grain products, traders need to allow for further back and filling in Wheat. It is possible that Wheat could sell off back toward the 6.00 to 6.30 area, but such a sell off would be a buying opportunity for long-term traders.

Markets: $ZW_F