This MoneyShow interview highlights several things to look for to identify an excellent buying opportunity in the stock market. I recorded it in August and I think the message still holds.  Short summary as of this writing is that some of the signs were present in Oct 2011 but the market still has high valuations.

To get a current update of the state of the market, join divergence-alerts.com or attend my free presentation at the Traders Expo Las Vegas on Nov 18, 2011.

Tags: MoneyShow, TradersExpo

I back-tested oscillators for swing trading to research an article for Fidelity. The results suggest simpler is better. Right now we’re in a market that’s lower than 6 months ago, higher than 10-days ago, and moving downwards. Backtesting confirms this is likely the top of the current trading range. Read the full article back-testing oscillators here:
https://guidance.fidelity.com/viewpoints/swing-trading-indicators

MACD Divergence visible at 50 bar lookback

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.

Tags: MACD, Stockfinder

I want to tell you the story of the Golden Braid because its a great analogy to active investing. 

In the beginning, its very awkward to grow out your hair.  Likewise, with a stock or other investment, a new position can feel awkward.   We check it often, and sometimes find its not looking as we want — maybe going entirely the wrong way.    After awhile, if neither the stock nor the hair has disintegrated, we can get comfortable.

In the middle phase, to grow a long braid, one has to do nothing.    Sounds easy but funny it doesn’t come very naturally for most of us!  With hair, everyone from friends to stylists – and stylists are the worst! – suggests a shorter cut or wonders aloud about the upkeep.   

Likewise, in the middle phase of growing a big investment position, if its moving the right way, you have to sit on your hands and skip many opportunities to sell.   Neither hair nor position can grow to its full potential if you keep messing with it.

Nothing grows forever.  We have to remain alert for a change of character and eventually make the hard decisions.   My blonde hair darkened.  Okay, I could deal with that.  Faced with gray wisps coming in, I had a choice:  Hang on and watch the gold slowly whittled away or lop the braid while it was still useful (undyed hair is made into wigs for kids on chemo.  see before and after pics of my “harvest”.)

Similarly, a change in character of the markets begs a decision whether to let the downdrafts slowly erode positions, or get out while the getting is still good.

Tags: stocks

I’m posting my weekend market analysis today for two reasons: 

• to illustrate how I use the MACD divergence signals
• because it looks like something interesting may be afoot

Step 1 – Form an overall opinion of the market direction

I use several indicators, factors, and experts to form my overall opinion of the markets.   Some methods I’ve back tested, others await testing.  For today, I’ll cite the following:

• McClellan Summation Index Negative Divergence
• SPY down hard and closing at its lows, after exhibiting repeated negative MACD divergences
• Weekly Trade Triangle Sell Signal — check out this video by Adam Hewison for a very articulate rundown

I come away with a bearish outlook for US stocks.

Step 2 – Check the Weekly MACD Divergences, then Daily MACD Divergences

Since my outlook is bearish, I will be looking more at the negative MACD Divergence signals.   I have yet to publish the back test results for shorting MACD Divergences but let me just say that I know to be VERY cautious with these signals on the short side.     If I owned any stocks on the negative divergence lists, however, I would sell them in a heartbeat, given my outlook from Step 1.

If my outlook were more bullish, I would examine the positive divergence signals for possible buy candidates.  But it isn’t, so I don’t.

Always check the larger timeframe first so that means looking at weekly charts before daily charts.  Whether you choose to review MACD Histogram divergences or MACD Lines divergences or both will depend on your goals and temperment.

I check in this order:

1. Weekly MACD Divergences
2. Weekly MACD Histogram Divergences
3. Daily MACD Divergences
4. Daily MACD Histogram Divergences

As of Friday’s close, two stocks appear as negative MACD divergences on all four lists: BIDU and SBUX

Step 3 – Gather more info about the candidate stocks

I check the charts of my two favorites from the lists.  Both charts look like reasonable negative MACD Divergences.   I also take a brief glimpse at selected Key Statistics.   BIDU is showing moderate but not overwhelming growth.   SBUX sports 4-figure earnings growth which I take to mean they have recovered a bit from the abyss.   Still MCD is making strong competition.

I also check my affiliate INO.com’s trade triangle trend analysis.  Again, I haven’t yet published my back test results but let me briefly say that my interest is to emphasize the Weekly Trade Triangle.   I don’t take all the signals but won’t trade against them, that’s for sure!

As it happens, SBUX  just got a weekly triangle buy signal so that scratches it from my list for now but I add it to my portfolio to watch.   BIDU is listed as “sideways mode” so that remains a viable candidate for a high-risk short sale.

Along the way, I noticed a fresh weekly triangle sell signal on AAPL.  That catches my eye because AAPL showed up on the weekly negative divergence list and my friends were talking about its upcoming product announcement Wednesday.   I also add AAPL to my watch list for consideration late in the week.

(if you want your own Trend Analysis, just click the symbol and enter your email address)

Step 4 – Apply Risk Management

The final step in assessing trading opportunities is applying judgement to reduce risk.  

I first consider what I know of my best current candidate from the steps above, BIDU:  its a crowd favorite that’s defied gravity before.  That’s not to say it hasn’t been knocked down, it just that as it hit a New High earlier in the week, I know it will come to the attention of lots of momentum traders.    

I decide to short BIDU, but select a risk amount on the small end of my scale.

I consider where to put my stop loss and realize due to the high price per share, it will be over $50 per share away from my likely entry point.  That means to keep my risk low, I will be trading very few shares indeed.   So be it.

I enter the order to sell short, along with an automatic stop loss and wait to see what next week will bring.

In summary, this is an example of my process of stock market analysis which highlights how the MACD Divergence signals can be used in the context of a broader market analysis.    I hope you can learn from this example and apply these tools to help your own trading.

Tags: MACD, MACD divergence, MACD Histogram, signal

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.

Tags: psychology

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.

Tags: behavior finance, fundamental, INO, technical

 In the 2nd Market Club Minute, Adam Hewison talks about a key decision you need to make as a trader – choosing a time frame.   Click here to watch his 1-minute video. 

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).

(BackTesting Blog is an INO.com affiliate.)

Tags: INO, timeframe

Professional trader Adam Hewison is distilling his decades of experience into one-minute videos.

Click here to watch the first one directly

The key word in the video is clearly “Confidence”

What do you need to do to gain the confidence you need to trade successfully?  Your answer might include items like these:

• Build knowledge of markets, charts, and indicators
• Follow strategies of experts such as Adam Hewison
• Back test strategies and indicators
• Trade small and then scale up once successful
• All of the above

Your answer is unique to you but whatever it is, I encourage you to take time early in the year to plan for your success throughout 2010 and beyond!

(BackTesting Blog is an INO.com affiliate)

Tags: INO