The Concept
Technical indicators are used in many charting software packages and help in analyzing the market, all technical indicators are derived from the price of the underlying stock or index. There are many technical indicators, however you don’t need to use more than 2 or 3 in a trading system, also the way of interpreting their readings has been diversified by traders.
Powerful Technical Indicators To Use On The Eminis
- CCI (Commodity Channel Index). It detects when a trend is about to start or come to an end, it gives a reading over a wide range, from -100 to over +100, it is considered to be bearish when below the -100 level, bullish when above the +100 level, and neutral when in between.
- RSI (Relative Strength Index). It identifies possible overbought or oversold areas, a reading of below 20 is suggests the market is oversold and a reading above 80 suggests the market is overbought.
- ADX (Average Directional Index). It confirms if a market is trending or trading within a range, you only need to make sure this indicator stays above 20, which confirms a trend is in place, and the line is rising, suggesting this trend is gathering momentum and will continue strong in the near future, a reading below 20 suggest there’s no trend in the market and prices just trade within a given range.
Using These Indicators On The Eminis
The overbought-oversold indication of RSI or Stochastics (an indicator similar to RSI) has not much meaning in today’s markets and is usually wrong, particularly when the ADX confirms that a strong trend is in place, in day trading however they are useful in confirming tomorrow’s price action, if the expected trend for tomorrow’s session is up, then these indicators confirm this scenario by showing upward direction on their lines. The only way to use these as overbought-oversold indicators is when the ADX is below 20 and falling, in this case they work fine and they do detect tops and bottoms.
Another thing these indicators can tell you on a longer term chart, is when a correction in prices is likely to occur, if a stock makes a series of new highs and continues to rise, but CCI or RSI make a series of lower highs over the same period of time, this suggests the rally on the stock has run out of steam and the market will make a sharp correction lower soon. This technique is known as divergence trading.
Be careful when this pattern shows up on the emini futures..
Example Of The 3 Indicators On The Nasdaq Daily Chart
The ADX indicator is at 16, just rising as the market broke out of a range, when the green line is above the red, it suggests an up trend is (or has been) in place, note the narrow trading range of Nasdaq while ADX was below 20 and went as low as 10! Also note CCI rising above 100 and confirming rallies, as well as the bearish divergence around October, suggested by RSI.
With CCI buy signals you have to act immediately, that is when price rallies and CCI rises above 100, whereas the RSI bearish divergence acts as an advance warning sign, but we couldn’t pinpoint the exact day the downward correction started, it only tells us to prepare for it.
