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Prices tend to consolidate periodically during an uptrending move prior to continuing the trend or changing direction. The indicators highlight a price consolidation when the ADX falls, while the MACD remains near or above its zero line. This pattern often occurs following a confirming pattern, as the chart of Bank of America Corp. (BAC) in Figure 4 illustrates.

Both indicators rose during the price uptrend in December 2000 and January 2001. Both indicators fell as price declined in February 2001. But the ADX continued to decline, while MACD remained at or above its zero line as price entered a trading range consolidation in March and April. Once prices resumed their upmove in May, both indicators once again began to rise.

SOME OBSERVATIONS

• ADX: The ADX can be confusing because it is interpreted differently from other indicators. Most indicators move up when prices rise, and they fall when prices decline. As seen in the chart of Toys “R” Us (TOY) (Figure 5), that was not necessarily the case with the ADX.

At point A the ADX was rising while price moved down. The ADX pulled back slightly at point B as prices rose. However, at point C the ADX rose in conjunction with prices. The ADX declined between points C and D, while price moved sideways before resuming the uptrend indicated by point D. The ADX dip into point E paralleled a price decline during June. But instead of a continuation of the preceding uptrend, the next ADX rise at point F was met with a further decline in price. The moral? Don’t try to secondguess price direction with the ADX.

• MACD: Even the venerable MACD misleads us at times. Often, we forget the MACD is basically a momentum indicator, so it does not always accurately reflect price movement either. Figure 6 displays an example with AT&T (T). In addition to the ADX and MACD in the upper panels, I plotted a 13-unit simple moving average of price on the chart. The 13-unit moving average tends to correspond with the MACD solid line crossing above and below its dotted trigger line when the MACD is accurately tracking price.

The combination can help traders stay on the right side of the market and increase the probability of successful trading results.

At point 1, the MACD solid line rose above its trigger line, which reflected the upmove in price. At point 2 the MACD crossed below its dotted line, following price to the downside. However, the MACD rise above its trigger line at point 3 was not joined by rising prices or an upsloping moving average. The MACD rose because downward momentum pressure had diminished as prices slowed their downward descent.

• Indicator combo: As the charts show, both the MACD and the ADX register their signals after the start of a price move, with the ADX slower to respond than the MACD. That means the indicator combination will not pinpoint tops and bottoms.

However, traders can expect the ADX–MACD combination to identify and capture part of a trending move. More important, it can help traders stay on the right side of the market and increase the probability of successful trading results.

Barbara Star is a part-time trader and former university professor. She is a past vice president of the Market Analysts of Southern California and led a MetaStock users group for many years. She is a frequent contributor to Technical Analysis of STOCKS & COMMODITIES. Currently, she provides individual instruction and consultation to those interested in technical analysis.