📚 PASS Research Analyst Certification Examination Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 15.9 — Technical Indicators

Imagine you are finalizing a research note on a mid-cap IT stock showing signs of a breakout after months of stagnation. The price has just crossed its 200-day moving average, and the bullish sentiment is palpable in the trading volumes. However, you know that false breakouts are the graveyard of retail capital, and you need to determine if this move has institutional conviction behind it.

This is exactly where the combination of Directional Movement Indicators (+DMI/-DMI) and the Average Directional Index (ADX) provides the tactical clarity required to validate your recommendation.

The +DMI and -DMI lines act as the compass, indicating the dominant direction of the price movement. When the +DMI crosses above the -DMI, it signals a shift in market psychology toward accumulation. However, a crossover alone is insufficient for a seasoned analyst; it merely signals a change in polarity. To confirm that this change is more than just a temporary fluctuation, we look to the ADX.

If the ADX is rising—specifically crossing above the 20-25 threshold—it confirms that the prevailing trend has sufficient momentum to persist, turning a potential trade into a high-conviction call.

Consider a scenario where the +DMI crosses above the -DMI, but the ADX remains flat or declining below 20. In this case, your valuation model might show an undervalued stock, but the technical reality suggests a ‘choppy’ market environment where momentum is lacking. Initiating a ‘Buy’ recommendation here carries the risk of getting whipsawed by sideways price action.

Conversely, when the +DMI is above the -DMI and the ADX is climbing toward 40 or 50, you are witnessing a powerful trend. This confluence gives you the confidence to categorize the stock as a ‘Strong Buy’ rather than a speculative ‘Hold,’ as the market is clearly prioritizing direction over indecision.

Ultimately, integrating these indicators forces you to distinguish between ‘price movement’ and ’trend strength.’ By using the DMI to identify the direction and the ADX to gauge the intensity, you prevent yourself from entering a position too late or exiting prematurely. As an analyst, your duty is to filter out the noise of the National Stock Exchange (NSE) order flow and present your clients with a trade that is backed by mechanical proof of conviction.

Remember that these tools are not predictive; they are reactive measurements of participants’ resolve, serving as an essential check against the cognitive biases that often cloud objective fundamental analysis.1

Nuance

⚠️ Nuance
A common professional misconception is treating a DMI crossover as an automatic ‘buy’ or ‘sell’ signal without evaluating the ADX level. Candidates often forget that in a low-ADX environment (below 20), crossovers are frequent and unreliable, acting as ’noise’ rather than signals. Always treat the ADX as your primary filter: if the trend strength is low, the directional signal is structurally unreliable regardless of the crossover alignment.

Check Your Understanding

Practice Question 1

You are analyzing a stock where the +DMI has just crossed above the -DMI, but the ADX reading is 12 and falling. Which conclusion should a prudent research analyst draw?

Practice Question 2

Which combination of indicators provides the strongest technical confirmation for a bullish trend entry?

This is a companion read for Section 15.9 — Technical Indicators from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. The ADX does not indicate trend direction; it only measures the strength of the trend, regardless of whether it is bullish or bearish. ↩︎