MACD Histogram Divergence

macd_histogram_divergence_spy_daily_arrows

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

macd_histogram_divergence_c_daily_arrows

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.

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:

MACD Divergence Signals Follow-Up

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:

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

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 the definitive guide to MACD by Jackie Ann Patterson:

The divergences sought and presented by the scanners are:  

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

Traders Expo Invitation Nov 19

Dear Trader,

Trading global markets has changed dramatically since the market meltdown last year. To profit today, it is imperative that you learn expert tactics to become more consistently profitable. And the place to do this is at The Traders Expo Las Vegas, November 18-21, 2009 at The Mandalay Bay Resort & Casino. Attend and learn how to minimize your risk and determine profit and stop levels before every trade, enhance your trade accuracy using the latest tools and software, and look at charts and indicators to find opportunities you’ve previously missed. Discover these and other top trading strategies to increase your percentage of profitable trades in 2010.

The Traders Expo is the one event this fall where you will learn everything you need to sharpen your trading edge. You will have opportunities to network with 50+ leading trading experts to find out what’s working for them (and what’s not) and attend educational presentations to learn expert strategies and techniques. Plus, you can evaluate the leading trading products and services available today from top companies in the state-of-the-art Exhibit Hall.

While you’re at the conference, please join me for the following special presentation:

1
Jackie Ann Patterson  
Discover complete Expo details, learn how to attend, and register FREE online. Or call 800/970-4355 and mention priority code 015487 .
 

With more than 125 in-depth workshops led by some of the best minds in the business, you are sure to expand your trading knowledge and gain strategies and techniques that you can put to use five minutes after leaving the conference (if not sooner), bringing you well on your way to increasing your profitability in current market conditions! You’ll hear from experts on a wide range of topics, from how to maximize your profits using money management and simple decision-making tactics for controlling your emotions, to understanding market psychology, and much more.

You will also have the opportunity to look over the shoulders of top traders as they trade live! Whether they lose or profit, you’ll learn the thoughts behind the actions, so that you can gain an understanding of how successful traders approach today’s changing markets. 

The Traders Expo Las Vegas is the ultimate opportunity to take a productive step back from the trading screen and gain a broader perspective by interacting with profitable trading experts. I look forward to seeing you there!

Sincerely,
Jackie Ann Patterson
Editor, Back Testing Report
Own Mountain Trading Company


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)

 

MACD Divergences on SPY Since 2001

People at the MoneyShow and elsewhere ask me, “why MACD?”

The short answer is that seeing how MACD Divergences pointed out some very good times to buy stocks and ETFs motivated me to want to use MACD.  So I learned the basics, made some good trades and a little money.   It wasn’t all roses however and taking a few too many losses prompted me to do all this backtesting.

You can see how the MACD divergence signaled good times to buy in this 10 min. video and summary about the SPY.

Since not everyone will want to take 10 min to watch the video, here’s a brief summary:

The MACD positive divergence in Oct 2002 and the one in March 2003 originally got me interested in MACD divergence.  In the TradeStation screenshot below, you can see the green MACD technical indicator at bottom showing a divergence as price hits a new low but the MACD does not confirm with its own new low.   This is a classic MACD divergence.    The dark green line is the backtesting strategy registering a profitable trade between Oct 2002 when it got the MACD bullish divergence buy signal and Sept 2003 when it got the MACD bearish divergence sell signal. Click the charts to enlarge them.

spy_macd_divergences_2002

Another interesting MACD divergence on the SPY takes place in Aug 2004. The SPY had been choppy in a trading range when the MACD bullish divergence signaled that this Aug bottom might be different. Sure enough the SPY broke out of the range. See the TradeStation screenshot below of the trade taken by the backtesting engine.

spy_macd_divergences_2004

What has the MACD divergence done for us lately?  Check out this chart of a MACD divergence catching a good time to buy in March 2009.  This most recent profitable trade on the SPY (green line in the chart below) comes on the heels of three attempts to find a bottom during the credit crisis that didn’t work out.    So you can see from this chart that nothing is perfect and you can’t expect every trade to be a winner.  In fact, this is a sample size of only one — SPY.   You should not rely on this to be representative of future performance.  

spy_macd_divergences_2009

These charts and video show why I am interested in the MACD.    I want an objective signal of good times to buy like Oct 2002 and March 2009.  However, I learned the hard way that its not enough to just see a few good examples and then go trade.   This is the beginning of the research, not the end. 

Are you interested in using MACD to find good times to buy stocks and ETFs? If so, here’s three steps you can take today:

1. Find out the historical track record of various MACD divergence signals.   I recommend reading the TruthAbout MACD series from BackTesting Reports. You can either get the reports directly from this link, or visit the new truthaboutmacd.com for a free video and CD-ROM.   If you are serious about trading with the MACD, the performance data in the backtesting reports is a must-read.

2. Learn to recognize a MACD divergence when it happens at the right edge of the chart.  The BackTesting Reports have some example charts, and the “Power Tools” book has a chapter on the MACD, or get the original Master Class to see Gerald Appel explain the MACD himself.  

3. Get software to scan the market for MACD divergence conditions. These signals don’t come around all that often so it helps to be able to find them when/where they occur. The software I use to scan the US stock market for MACD divergence is available by clicking here.

( MACD stands for Moving Average Convergence Divergence.  SPY is the Exchange Traded Fund (ETF) of the S&P 500 which is often used as a proxy for the whole US Market.)

Updated 10/16/09 to fix typos.