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.

Tags: Death Cross, MA Crossover, MACD, MACD divergence

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?

Tags: exit strategies, MA, MACD

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

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

Download the free MACD Rain StockFinder chart 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 the chart by email.   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 recieve the free chart.

Purchase the BackTesting Report MACD Divergence RealCode scans for StockFinder

Tags: MACD, 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)

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

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

4.  Center  (click for bigger image)

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.

Tags: exponential moving average, MACD, Stockfinder

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.

Tags: MACD, MACD divergence, Market Club, SPY, trendline

MACD Histogram Divergence or MACDH Divergence occurs when price action is not confirmed by the common MACD Histogram.    The top picture is a screenshot of a daily chart of SPY.  The price is plotted as daily bars in the top section.  In the middle, is the MACD indicator with yellow bars for the MACD Histogram (MACDH), yellow MACD line and blue signal line.   The bottom plot is volume.

The MACD Histogram Divergence is marked by green price bars.  It is a MACDH positive divergence and generally considered a bullish signal.  The green arrows are drawn to illustrate the nature of the MACDH Divergence:  the price  makes a lower low while the MACDH indicator makes a higher low.   Click on the chart - twice - to enlarge it for a better view.

One interesting thing to note is that the MACD lines themselves are not showing a divergence at the same time as the MACDH divergence.   It is not necessary for the two types of divergence to occur together.   In this example, the MACD divergence happens a little later, at the 3rd new low of price.   As it happens, the price makes a longer rally from that divergence point.

A MACDH negative divergence is generally considered a bearish signal.  It is the opposite situation from a positive divergence.   A negative divergence  is said to occur when price makes a new high but the MACD Histogram indicator makes a lower high.   This is illustrated by the red arrows in the screenshot below of a daily chart of Citibank, NYSE: C

To learn more about trading with MACD, including detailed data comparing the historical performance of MACD Histogram Divergences with MACD Lines Divergences, visit the TruthAboutMACD.com and watch a free video.

Tags: MACD, MACD Histogram, MACD Histogram divergence, macdh

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

Tags: exit, MACD, MACD divergence, MoneyShow, stocks

Last weekend’s post highlighted three stocks from the negative MACD Divergence scanners: AAPL, BIDU, SBUX.  Disclosure: I am now short all three as I write today.  

All three shorts are sporting open profits.   Being 3 for 3 is much better than the odds suggested by backtesting MACD/H negative divergences.   Having just recorded a video about shorting on MACD divergences for The Truth About MACD series, I’m very much aware that its too early to declare victory on these trades.

I did try to increase the odds by only shorting a negative MACD divergence when I saw other compelling evidence of a market drop.    Continuing to monitor the markets makes sense and here are more elements of my bearish case to add to those from last week:

• Market indices continued down
• Nasdaq broke a key trendline - click here for affiliate Adam Hewison’s analysis
• Market leader AAPL dropped hard after its product announcement (watch a Hewison video on AAPL).  Since AAPL led the way up, I wonder if it will lead the way down.
• Breadth (A/D line) dropped below its 50-day MA

Selling short at this point may be too aggressive and I’m not recommending it for everyone, or to anyone for that matter.  Even if you don’t want to go short, you might want to glance at the Signals pages to see if any stocks you already own are on the lists and consider carefully whether you want to own anything with negative divergences at this time.

Signals

• MACD Divs Daily
• MACD Divs Weekly
• MACDH Divs Daily
• MACDH Divs Weekly

Tags: MACD, short

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