Technical Analysis of SPY

The premise of technical analysis is that the price carries information about a market’s future potential as well as its past. Since price is numerical, we can use mathematics to aid our analysis. For example, a moving average of price smooths its fluctuations and allows us to focus on the overall trend. Today the S&P500 opened with a gap above its 200-day Moving Average. The chart below shows that with the dotted blue line as the 200-day MA. Technical analysis regards this as a bullish sign.

With an ETF such as SPY we have an opportunity to look under the hood to see how well its component stocks support it. Continuing with our example, we can check how many of the S&P500 stocks are above their 200-day Moving Averages. See the screenshot from Telechart below.

We see that 283 of 500 stocks in SPY are above their 200-day MA. That’s slightly better than half and a terrific improvement from last month.
This is one example of the type of analysis that you can do on stocks in an ETF. To see more, check out the eMoneyShow webcast and chat room on Sept 15, 11am EDT. Click here to register.

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.

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.