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:
- Weekly MACD Divergences
- Weekly MACD Histogram Divergences
- Daily MACD Divergences
- 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.