At the MACD Rain StockFinder webinar, a question came up about a MACD Divergence on the weekly chart of the Dow 30, as shown in the chart of the NYSE:DIA (Diamonds Trust Series ETF that represents the Dow 30). Click chart to see larger view.
The price and MACD indicator action lately on the weekly meets the basic criteria for a MACD divergence: the price is reaching a higher high while the MACD is tracing out a lower high. During the webinar, the BackTesting Report MACD Divergence scanner for StockFinder did not mark that DIA weekly negative divergence on the default chart because price makes a higher high within 100 bars – the default lookback period. But when the lookback period (user input DivSpan) is set to 50, the MACD Divergence on the weekly chart of DIA is marked in red. See the chart at top.
The choice of 100 for the default lookback period was arbitrary. Its the value used for the BackTesting Reports. Other values were not tested.
Given that many stocks have similar price patterns of a higher high in 2008, to get a comprehensive view of all the negative divergences on weekly charts, one needs a shorter lookback period at least until Oct 2010.
Join me and Michael Thompson of Worden Brothers for an educational webinar about the MACD. I use the new MACD Rain chart to step through the MACD signals in order of their appearance in a stock market rally and eventual decline. Market analysis follows with a look at MACD divergence on a selection of ETFs.
The free MACD Rain StockFinder chart promotion has expired.
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While the “leaders” of this market have lately been low-priced regional banks rocketing off the bottom, the stocks more typically thought of as leaders don’t seem to have so much fuel. We seen that in the sheer numbers of stocks found by the MACD divergence detectors — negative divergences outnumbered positive divergences many times over.
This week the NASDAQ:QQQQ and the AMEX:SPY (once again) showed us negative MACD divergences on the daily chart. Here’s a screenshot of the SPY showing a gentle bearish divergence on the MACD lines and a more severe divergence on the MACD Histogram.
You can see another interesting development in the screenshot as well. The SPY is breaking its upwards trendline.
Since I’m not an expert in the art and science of the trendline, I went back for a quick refresh to a handy reference on trendlines: the Market Club email trading class lesson #2. Titled ‘Finding a Friend in the Trend’, it tells about drawing and reading a trendline.
An important point for us today is to wait for two closes below the trendline before considering it broken. Count #1 today!
Just a couple other comments on this lesson of the course…
1. Its got a nice chart of a double bottom with a sharp V between lows.
2. One section where I have to disagree: it says bottoms are drawn out while tops are quick. Maybe in futures but in my experience with stocks this decade, we’ve had relatively quick bottoms and drawn out tops.
That leaves us to consider whether today is just another minor move in a long top or is the trend turning. Watching that trendline just might help us understand.
To get the free 10- lesson email trading course from my affiliate Market Club, click here. For more details, see this guest post by the course’s author, Adam Hewison.
You can learn the past performance of key buy/sell strategies in my two sessions:
07:45 AM – 08:30 AM Exit Strategies for Active Investors
Here we focus on SELL strategies including stop losses, profit targets, MACD negative divergences and more. I’ll present highlights from the Exit Strategies reports which are not recorded anywhere outside this $100 series of reports. This session is geared towards active investors who like to hold for weeks, months or even years but do plan on selling stocks someday and want to leverage technical trading skills to pick a good time to get out. The real bonus for attending live is real-time analysis. Please bring the tickers of any stocks you are considering selling so we can check exits for them in the session.
02:15 PM – 03:00 PM The Truth About MACD
Highlights from the Truth About MACD series, focusing on BUY signals. We’ll cover important patterns such as the MACD divergence. Audience participation is welcome as we check the end-of-day charts for your stocks.
Click this link for complimentary registration for you (and spouse) today:
My charts are plotted as candlesticks because they highlight detailed movements around the open and close. Candlesticks also present recurring patterns which aim to portend the price action and which I haven’t (yet) backtested. However, since candlesticks are on the charts in my BackTesting Reports, videos, and software, I want to give everyone an opportunity to how they are interpreted by experts.
If you’re interested in learning more about candlesticks, check out this complimentary video from my affiliate partner INO.com: Click Here to Watch Now
The video is titled “Advanced Applications of Candlestick Charting”. When you watch, authors, software programmers, and co-founders of the International Pacific Trading Company, Gary Wagner & Brad Matheny will walk you through:
-History of candlestick charting
-How to interpret candlesticks
-How to merge techniques of Eastern & Western technical analysis together
-How to merge candlestick techniques with your current trading plan
You’ll watch and listen as Wagner explains the importance of using this strategy. He says, in part, “Candlestick patterns are a mathematical formula which illustrate the psychological market sentiment. In other words, as a market reverses, or a market is moving in an up-trend, there are certain traits that can be distilled in terms of mathematical formulas that will reveal some very important information.”
This 100 minute complimentary video can be found on Trend TV. You don’t have to worry about watching the whole video at once. After you have a password, you can revisit anytime to watch the rest of a video, review a video, or watch other videos on Trend TV.
Watching the football teams psych up for the playoffs today, I’m reminded how big a factor emotion can be! In sports and many other competitve endeavors we strive to pump ourselves up emotionally to win. Check out this video by Adam Hewison to see how dangerous those same emotions can be to your trading.
Adam Hewison’s Minute 3 video (click here to watch) suggests traders choose between technical and fundamental information for their trading decisions.
I have to ask: How about using what works?
We have the technology now to check out how well each of the different types of data performed in the past. You can look at the track record of experts writing newsletters, back test technical indicators, back test fundamental numbers like Earnings Per Share (EPS), Price/Earnings, and most of the key statistics of a company. Services tell how well seasonal predictions correlated with actuals, and even programs to data-mine for dates a market “always” moves.
With all that at our fingertips, we’re in a great position to estimate the quality of data source, and cherry-pick the data sources that demonstrated their effectiveness — or at least avoid the ones that are complete hooey.
However, our human brains are wired for stories. Both fundamental analysists and technical analysists can weave compelling stories. Unfortunately, at times the juiciest stories are not based on the strongest data.
Perhaps the key question is: Do you want to make your decisions based on objective data with a known track record, or do you want to remain a sucker for a good story? Adam Hewison is right in that you need to decide what type of information you will use to trade.
One way to facilitate that decision is to list the types of traders and their time frames:
Buy and Hold Investor – forever
Active Investor – longer term of a year or more but has a plan to sell eventually
Position Trader – catch one leg of a trend, hold trades for weeks or months
Swing Trader – get in for a quick pop and out within days
Day Trader – doesn’t hold overnight
Market Maker – constantly offers a bid and ask price
Understanding yourself is essential. Understanding the different risks and rewards of trading in each of these timeframes gives you a framework to find the optimal spot for you. A good place to find out more is the BackTesting Report Baseline – click here to download it directly (no registration required).