Watching the QQQs

Watching the QQQ gave important clues to the market this summer.  Negative MACD Divergences on the weekly chart (top) of the QQQ showed up just before the big drop in August.   As I write, QQQ is running into overhead resistance from the old up trend line drawn on the weekly chart (top).  On the daily chart (bottom), QQQ reached up to touch the 50-day MA and fell back.  If the NASDAQ leaders retreat, I would expect the market to follow.

QQQ on Sept 1, 2011 - Weekly and Daily Charts
TradeStation Screenshot of QQQ on 09/01/2011

The small cap Russell index, shown below in charts of the e-mini TF, has not even performed as well as the NASDAQ.   You can see from the weekly chart below (top panel) the past negative divergences.  In early August TF failed to achieve new highs and MACD confirmed the weakness – a fuzzy negative divergence.  On the rebound, it is not even close to the past uptrend line.  On the daily chart (bottom), notice TF’s current inability to reach its 50-day MA like QQQ.

TF Weekly and Daily Charts as of Sept 1, 2011
TradeStation Screenshot of TF on 09/01/2011

In summary, I think there could be further to go on the downside before the market gets ready for election year.

Upcoming Educational Presentations

TradeStation Strategy Network, Sept 6 at 4pm EST, Join me for a live online presentation on the latest in MACD Divergence technology. Click here to register for TradeStation Webinar

Trading Options for ProfitS (TOPS) Group Meeting, Sunnyvale CA, Sept 10 at 1pm PST. If you’re in town, feel free to attend this meeting for an extended talk on technical and fundamental indicators to get insight into the movements of the broad market.  Email RSVP to ovug (at) helpone.com

Traders Expo Las Vegas, Nov 18 2011 8am PST on MACD Divergences and 5:30pm PST on Weekend Market Status
Treat yourself to a trip to Vegas to sharpen your trading skills! Click here to register for Traders Expo

Bulls and Bears Fight Over S&P500

The stock market is often said to be a fight between the bulls and the bears.   Technical analysis aims to help traders understand market behavior by studying the price action which is akin to the tracks left by the various market animals.

In last week’s market action, we can see the bull and the bear squaring off as two powerful and infrequent “tracks” showed up on the S&P 500.

Representing the bulls, we see a MACD positive divergence on the daily chart of the S&P 500, as shown in the StockFinder screenshot on the left.

Representing the bears, we have a Death Cross on the daily chart of the S&P 500, as shown in the StockFinder screenshot on the right.

Of course, as traders the battle is of more than abstract interest — our success depends on siding with the winners as much as possible and protecting ourselves from losses when we find ourselves on the wrong side of the trade.
 
To find out more, here are three complimentary resources:
 
Focus on MACD with my Las Vegas MoneyShow video
 
Learn about Golden Cross and Death Cross in my other video archive from Las Vegas
 
As general resource, check out TraderPlanet.com   It provides market commentary, charts and quotes, news, educational videos, live webcasts and many more services absolutely free of charge.  I will be a contributing writer to TraderPlanet very soon. If you register with TraderPlanet.com, as a thank you gift, you’ll immediately receive access to their trading ebook library, where you can select among several trading topics and authors. Register here: http://www.traderplanet.com/freebooks/636

SPY: Divergences, Trendline Breaks and More

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.

macd_divs_and_trendline_break_spy_sf_010427

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.

Best Stock Yesterday Indicated by a MACD Divergence

Apple (NASDAQ:AAPL) dominated the headlines yesterday with good earnings news, giving it a 6% gain on the day.  But do you know what the best stock (biggest gainer) really was?  Regional bank Dearborn Bancorp, Inc (NASDAQ:DEAR) was actually the top stock on the day with a massive 74% increase.  Today as I write this, DEAR is continuing upwards, and more regional banks are the top % gainers while AAPL holds steady.  (comments? please add your thoughts on this post)

How might you find stock picks like DEAR before they shoot to the top?  One indicator is a MACD Divergence.  This daily chart of DEAR shows a MACD Histogram divergence detected at 12/17/09, flagging a buy at $0.49.  That simulated trade is still open above $3, which is a 6x gain!

Daily Chart of DEAR
Daily Chart of DEAR

 

Weekly Chart of DEAR
Weekly Chart of DEAR

Now DEAR is an extreme example.  Not every MACD Divergence turns into a top stock.  If you’ve taken The Truth About MACD video course you know what to expect: many divergences get stopped out.  But the potential exists for a powerful reversal if you can find it ahead of time, as we can see in the DEAR example.

Which brings me to my question for you…how do you want your divergences served?

After repeated requests for a service that alerts traders to MACD divergences as they arise, we’re looking at how to make that happen and would love to get your input and insights.  Please take a moment and click your favorite checkboxes on the survey.  It will help us design a service that’s most useful to you. 

https://app.icontact.com/icp/sub/survey/start?sid=7910&cid=369225

The Thank You page for the survey will point you to sample web pages with recent divergences from the scanners.  Among the stocks from the weekly scans is EUBK, which was #13 yesterday with a 21% gain.   We’ve since updated with this week’s MACD Signals; here’s a screenshot from apr 16, (click to enlarge).

macd_div_weekly_100421

(Disclosure: I don’t have a position in DEAR or AAPL.  Even having all the divergences in front of you isn’t a guarantee of being in the best stock at the right time.  Written apr 22 and updated apr 23 2010)

Exit Strategies and MACD at MoneyShow Las Vegas Workshops

moneyshow las vegas 2010

Please join me at the Las Vegas Money Show, Tuesday May 11, 2010.

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:

Today’s Analysis – Example Using MACD Div Signals Pages

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.

MACD Divergence Signals

macd_histogram_divergence_weekly_chartThe new Signals pages give you a snapshot of the MACD divergence signals across all NASDAQ stocks.   This gives you a quick and easy way to find these elusive signals without flipping through thousands of charts.

In keeping with our mission as an educational resource, these MACD divergence signals are posted to show you an easy way to find examples for further study.   Before trading, we strongly enourage you to assess the track record for divergences — it is not perfect — by reading either the reports or videos in the Truth About MACD Series.

The divergences sought and presented by the scanners are:  

The scheduled update times are:

Weekly MACD and MACDH Divergences: once a week, calculated on each Friday close and posted no later than Monday evening

Daily MACD and MACDH Divergences: twice a week:

  • calculated on each Friday close and posted no later than Monday evening
  • calculated on each Wednesday close and posted no later than Thursday evening

Trend Analysis is provided on each stock symbol by affiliate partner INO.com, giving you complimentary technical analysis briefings using entirely different criteria.   Trend Analysis uses trend following techniques while MACD Divergences are a reversal technique.    You can consider both for a more balanced view of each market.   To get the Trend Analysis, click the symbol on the Signals page list – it costs you nothing and and no payment info will ever be requested.

Check out the Signals pages today:

Negative Divergences Abound

Since its not always easier keeping up with the market over a long holiday weekend, I thought to share my weekly “homework”.

Plenty of interesting red flags from my MACD Divergence Detector running on StockFinder®.   It found MACD and MACDH negative divergences on SPY, DIA, ISRG, BIDU to name a few.    Looking at the chart of SPY below, its clearly not the first negative divergence.

MACD Lines and Histogram do not confirm price action on SPY
MACD Lines and Histogram do not confirm price action on SPY (click to enlarge)

The other SPY negative divergences kicked off a slight decline, followed by a rally.   What’s to say that won’t be the case again?

First off, consider that the markets may very well rebound again.  It is, after all, a seasonally strong time of year.  I don’t want to make recommendations or predictions here, just share some observations.  See Truth About MACD BackTesting Reports  for data on the historical back test performance of MACD divergences.

The next observation to share is that breadth and New Highs / New Lows (NH-NL) exhibit extraordinary negative divergences of their own.   Here’s a chart with McClellan’s Summation Index to show what I mean.   (Note that I didn’t personally run a back test of McClellan’s Summation Index.   Tom McClellan told me he did.  I wish the strategies of other people who have told me that had performed better in my back tests.  Anyway, until I get around to doing the back test myself, I am taking McClellan’s word that the summation index that bears his name is a useful indicator to have in the toolbox.)

Red arrows highlight divergence between SPY (green) and McClellan Summation Index (yellow)
Red arrows highlight divergence between SPY (green) and McClellan Summation Index (yellow)

With these kind of negative divergences showing I am certainly not thinking of buying the dip!   In fact,  negative divergences are a signal to sell long positions in my book.    

If you are also standing near the door (so to speak), or working on your own stratgy for cutting losses and taking profits, you may want to take a look at the Exit Strategies series of BackTesting Reports.   They show back test results for various kinds of fixed stop losses, trailing stops losses, and profit targets.    That stuff isn’t as glamorous as buy signals but if you didn’t make a solid plan for when to sell before you bought, the next best time to think about these things is while the market is up.

MACD Divergence

MACD Divergence on SPY Weekly Chart
MACD Divergence on SPY Weekly Chart

MACD Divergence typically means a divergence between the MACD technical indicator and price.   The name MACD divergence is a little confusing and new traders are inevitably unclear about the definition of a MACD divergence or, most importantly, how to recognize one.  Once identified, the next question is how long after the MACD divergence signal does it remain a consideration in the analysis of price action.   Finally, or (perhaps initially to know why we might care) , what kind of performance might a trader expect from a MACD divergence — win rates, expectancy, drawdowns, tendency to jump stops – these are all important considerations to a trader selecting an indicator or strategy.

Naming

MACD spells out to Moving Average Convergence Divergence.   Adding another divergence on the end of all that may at first seem redundant but really it means that two sets of things are diverging.   The first “Divergence” built into the MACD acronym refers to the movements of the two moving averages that form the basis of the MACD.    (The MACD itself is the difference between two moving averages of price, usually the 12-day EMA and the 26-day EMA. )   The second “divergence” in MACD divergence refers to a disparity between the price action and the movements of the MACD indicator.

Identifying a MACD Divergence

 The basic characteristic of the MACD divergence is that the indicator does not confirm price action.  If the price makes a new low but the MACD indicator makes a higher low, that is called a positive MACD divergence.  

MACD Divergence
Positive MACD Divergence on IWM*

On the other hand, if price makes a higher high but the indicator makes a lower high, that is called a negative divergence.   Sounds simple enough but in practice there are subtleties such as the appropriate time between extremes of price.     Further, some traders will look for specific characteristics in the divergence such as minimum or maximum price differences between the price extremes or the slope of the price trend at the time of the divegence.    This adds complexity to the identification process.  

An efficient way to identify MACD divergences is to use a software scanner that can identify which stocks, ETFs, or other instruments are experiencing a MACD divergence at the right edge of the chart.

MACD Divergence on THS

Red arrows highlight the negative MACD divergence on this StockFinder chart of THS at right.

Another easy way to find macd divergences is to subscribe to divergence-alerts.com, which reports macd divergence signals on stocks, ETFs, and e-mini futures.
 

Persistance of a MACD Divergence

Some traders may look at a divergence as an occurrance that impacts an entire trend.   Others may consider that the MACD divergence is only in force until the MACD Histogram moves in the opposite direction.  One way to settle the debate among traders about how long a MACD divergence remains a factor is to back test different scenarios and compare them.

Performance of a MACD Divergence

For a high-level comparison of the historical performance of the MACD Divergence to other MACD signals, watch the free video at the Truth About MACD site.   Or you can read the BackTesting Report #8: Finding Big Bottoms with MACD Divergence, which is part of the Truth About MACD series, for the detailed historical stats from our large-scale back test.   Only with a solid understanding of the strengths and weaknesses of the MACD divergence can a trader  make the best use of it.

* IWM is the ETF of Russell 2000

SPY is the ETF of S&P500

S&P 500 Analysis with MACD Divergence

In my previous post I mentioned that I found interesting videos from Adam Hewison.  Click here for a timely example which includes MACD divergence analysis of the S&P 500 near the end of the video.  (no registration required to view the video)