The DMI signals whether a stock is bullish or bearish. It also shows the strength of the current bull/bear trend. This is my favorite indicator.
There are 5 parts to the DMI but for our purposes we only need to focus on 3; the ADX, the -DI (negative DI), and the +DI(positive DI). These components are highlighted below.
-DI and +DI:
Crosses between the +DI and -DI indicate changes in the trend of a stock. For example, if the +DI crosses above the -DI the stock has turned from bearish to bullish and will begin to move up. If the -DI crosses above the +DI the stock has turned from bullish to bearish and will begin to move down as seen in the chart below. Click the chart to enlarge. The +DI is green and the -DI is red.
In the first circled area the +DI crosses above the -DI, LVS turns bullish, and runs from $80 to $144.00. Since the stock turned bearish when the -DI crossed above the +DI in November of 2007 the stock has fallen from $125.00 to under $10 last week.
The ADX indicates the strength of these moves. If the ADX is below 20 the strength of the move is considered weak or non trending. When the ADX crosses above 20 the trend is increasing in strength and will most likely be sustained for some time.
I don't really care how strong the trend is so I usually don't pay attention to the ADX itself. I watch the crosses between the +DI and the -DI. If I'm long on a stock I need to know when the bullish trend will end so that I can either exit the trade or start to short the stock to avoid losing my gains. +DI and -DI crosses show me when I should consider entering or exiting a trade. Examine the chart below to familiarize yourself with this indicator. As always examine as many charts as possible to get used to seeing these crosses.
