Here’s how I traded Amazon (AMZN) with ADX/DMI. (July 18, 2019)
AMZN NUGT
I want to look at Amazon ( NASDAQ: AMZN ) with this weird indicator called ADX/DMI. The reason I am looking at this (for members, you know about this), I taught a class just yesterday, it was a little over an hour-long, we’ll have a Q&A on it next week. I talked about this indicator, that it is basically like a trend finder and you can use different settings on it. I thought this would be a good follow up, if you took that class then this should make a lot of sense to you. I am going to try to explain it as quick as I can.
The idea is that this thing will show you, actually, kind of when a stock is first starting its trend. Think about it this way, there are two directions a stock can go, up or down. If the red line, which is down, the green line is up; if the red line is above the green line that means that the stock is going down. If the green line is above the red line that means the stock is going up, this is ADX down and dirty in 1-minute.
Then we’ve got this black line called the ADX, which is the average directional movement. Basically, it’s an acceleration indicator. When this band is running up really, really high, really fast, that means the trend is accelerating. Which trend? Well, is it red over green or green over red? If it’s green over red that means it’s an uptrend. If it’s red over green it means it’s a downtrend.
This is the important part, most of the time this isn’t going to be trending. You are going to see this way here doing absolutely nothing. That is a reflection of the volatility of the stock being basically nothing it’s trading sideways. Remember this is a trend finder and there was no trend in the stock here during the middle part of the day. So because I was looking at this stock yesterday I decided to check it out today in this ADX format. Let me walk you through this trade.
This is like at 2:00 this afternoon. Red over green means the stock is moving down. ADX is way down here at the bottom of the clip here, meaning there is no real trend. So we keep going, green is starting to get over red, that’s interesting. We also see the stock starting to tick up here. Don’t pay any attention to this moving average it doesn’t matter. Now the stock is up at a new high relative to here.
Again, green is good. So we keep going, now you will notice the ADX line up here around 22.00. What we are looking for is at least 25.00, 30.00 would be better. Once this black line here is up, this black line here is up above 25.00 and that’s the black numbers here, that’s a good thing. When it hits 30.00 that’s a better thing, that’s what we want to see happening, right? So you see the stock here, the ADX line doesn’t get you in here but when it gets to here, starts getting your attention, it got mine. I am typically not an afternoon trader, a day trader type, but today I made a boatload of money on a class that I taught last night just by using what I was showing you guys there.
Now, here’s the ADX line up at 25.00, the stock is really taking off, it keeps going. Now, look at the green line. Not only is the green line above the red but it has eclipsed the high red line here. So it’s gone up at a more extreme level than the stock went down at an extreme level when the red line peaked. So this was a real line of demarcation, these three peaks right here at about this 40ish line. Once the green line gets above here, that’s even a ton more confirmation that this is a big move.
Now obviously, we are looking at the price, hello, you can see that, but I am looking at this indicator here. We have got several things flashing in our favor, okay? Again, green over red, good, green is good. ADX line, this is the black line, which tells us how fast this stock is moving in a particular direction. Which direction? Again, green is up, red is down. If green is above the red, the direction is up. This is not hard it just looks really complicated but it’s not. So we’ve got this above 25.00, and not only that but you see this dashed line here? This is a signal line; it’s a moving average of the black line so it moves a little bit slower.
This crossover is similar to a MACD crossover. This crossover of the ADX, the black line from below to above the ADXR, which is a moving average of the ADX, this is a signal line so this is a buy signal here. Now we’ve got multiple things happening here. Basically right at the same time. Right about here, we get the crossover here, somewhere around here the stock is right up at 1961.00, 1962.00, something like that. Big green line peaks above the red line, it’s all good in the hood.
And so then we can look at volume and see that volume is picking up. Are you seeing this? You could look at this and say, “Well, I think I am too late for this move.” Not so much because this doesn’t happen during the middle part of the day, it happens as a stock goes into the close. And you know what has happened with Amazon ( NASDAQ: AMZN ), right? The stock has just kept going up. By the way, this orange line here is the volume-weighted average price. This is where you can expect the stock to find resistance. So this is a time, if you are trading options (I was trading the options that expire tomorrow, day trade), you are looking to take some profits here. Keep yourself in a position to make money if the stock runs higher, but it might not.
You could think like, oh, there it goes. Don’t think that way. This is a 1-minute chart, it could be that somebody accidentally spilled their coffee and they pushed the buy button on 15 shares, it’s not that big of a deal. We need to see definitive moves; still, green over red, the ADX line still at 45.00, this is a very strong uptrend, we’re farting around, there we go. The volume-weighted average price right down here, this is a time to be adding to this position. Now you’ve got your initial buy signal right here around 1961.00, 1962.00, 1963.00, somewhere there you are buying call options. Now the stock is up $8.00, trust me, you are making money on those call options. And then the stock just continues to move up.
One thing I will leave you with here, this is not a good indicator for getting out of a position. Once you are in you need to use trendlines and different time frames, stuff like that, not looking at ADX as a complete trading mechanism. Welles Wilder did design it to be a trading system but we don’t really know Wells Wilder to be a great moneymaker. We just know him to be making really interesting indicators.
Anyway, you are staying in Amazon ( NASDAQ: AMZN ). The stock trickled sideways and now it is up after hours. The bottom line is this, this ADX indicator worked really, really well intraday. I taught it yesterday from a daily standpoint, just looking at daily charts. But you can see this puppy will really work on an intraday basis. I am not even going into how it worked on NUGT ( NYSEARCA: NUGT ) today. That’s a whole ‘nother story that I am going to leave for our members.
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