Trend-Following Indicator Back-Tests

Have a look at my research on trend-following indicators in which I systematically analyzed 10 ways to ride the trend in US stocks. The back-testing was done with Wealth-Lab Pro(R) for Fidelity Investments. The stocks considered were the S&P500 components. The 10 indicators tested were:

  • Average Directional Movement Index (ADX)
  • Commodity Channel Index (CCI)
  • Channel Break-Outs (NH/NL)
  • Moving Averages (MA)
  • Moving Average Crossover (MAXO)
  • Moving Average Convergence Divergence (MACD)
  • Momentum (Mo)
  • Rate of Change (RoC)
  • Linear Regression
  • Chaiken Money Flow (CMF)

Check it out – the data may surprise you!
https://www.fidelity.com/learning-center/technical-analysis/how-to-befriend-the-trend

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

On Knowing When To Sell

SPY Sell and Hold Signals

I want to share a couple key ideas with you.  I just answered all the write-in survey questions from the recent MoneyShow and if there was one theme, it was “how to know when to sell?”

The truth is that there is no one-size-fits all answer to that question because it depends on your goals and outlook. 

This particular moment in the market illustrates that really well.  (See chart above)  Short-term strategies such as price crossing the 20-day moving average and even intermediate-term strategies such as MACD Divergence have long since given a “sell” signal. The aggressive traders among us – myself included — have sold short and are now watchful of an opportunity to cover.

 I also follow a longer-term long-only strategy for my retirement funds.  The SPY below its 200-day MA tells me not to buy.  But is it a sell signal?  No, according to the 50/200 MA pair because the 50 MA has not crossed down through the 200 MA to give the Death Cross signal.    

 How will it play out this time?  I don’t know.  What I do know is how the strategies mentioned above have performed over the last fourteen years.  That data helped me to make the decisions about which signals to follow and with what capital.

 This brings me to the other frequently-asked question at the show:  “What is BackTesting Report?”

 BackTesting Report started as a series of e-books about the historical performance of various technical indicators and trading strategies.  I began the work because I wanted to know – for my own trading – what I might get out of these strategies, and which I might use for buy/sell decisions.

 BackTesting Report has expanded beyond the reports to videos but the concept is still the same:  to provide the data  to understand the trade-offs between the various technical strategies and pick the best strategy.

What about you?  How do you know when to sell?

DIA Weekly MACD Divergence

MACD Divergence visible at 50 bar lookback
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.

MACD Rain StockFinder Webinar

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.

Watch the webinar archive

macdrain_storm
The free MACD Rain StockFinder chart promotion has expired.

You can get sample MACD divergences by filling out the form below.   You’ll first be sent an email to confirm that you want to receive information from BackTesting Report.   Once you confirm your request, you receive email each week with MACD divergence stocks.   You will also receive other information from BackTesting Report.   We do not share our email list and you can opt out any time.    Please enter your name and email below to receive the free chart.

Purchase the BackTesting Report MACD Divergence RealCode scans for StockFinder

How to Align MACD Zero Lines in StockFinder

In a previous post, I lamented the way StockFinder by default gives a non-standard plot of the MACD indicator and the MACD Histogram.  To fix it, you need to do two things.   The first is to set all the moving averages, even within the MACD, to Exponential.  That’s quick and easy.    The second is to get the MACD lines and the MACD Histogram aligned in one pane.  That is a little trickier.

This article explains how to get both MACD lines and histogram plotted in a pane with the same zero axis.   The steps are:

1. Select the MACD as shown (click for bigger image)

macd_stockfinder_same-zero_axis

2. Right-click to bring up menu as shown  (click for bigger image)

macd_stockfinder_same-zero_axis_fix2

3.  Select “Edit Plot” on the StockFinder dialog box (click for bigger image)

macd_stockfinder_same-zero_axis_fix3

4.  Center  (click for bigger image)

macd_stockfinder_same-zero_axis_fix4

5. Repeat for MACD histogram indicator in same StockFinder pane

 

While you are in there, don’t forget to change the default Moving Average types in the MACDH plot from Simple to Exponential.   See the Stockfinder’s Quirky MACD post  for more info.

Or you can just use the BackTesting Report add-in software for StockFinder , newly updated to plot the zero lines correctly.

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.