The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
MACD - Moving Average Convergence/Divergence
The MACD "Moving Average Convergence/Divergence" is a
trend following momentum indicator that shows the relationship between three moving
averages of prices.
This method can be used for any time frame. It could be 5 minute
bars, 15 minutes bars or daily bars. Many traders will also trade in multiple time frames
using a longer time frame for trend, and the shorter period for entry and exit. The MACD
is the difference between a 26-day and 12-day exponential moving average. A 9 period
exponential moving average, called the "signal" (or "trigger") line is
plotted on top of the MACD to show buy/sell opportunities. On the charts below, the MACD
line is the green colored line, and the trailing, slower moving line is the signal line.
Some technical analysis programs will show the MACD as a histogram bar.
There are three popular ways to use the MACD: crossovers,
overbought/oversold conditions, and divergences.
The most common use is as a crossover method. Using this
interpretation, the trading rule is to sell when the MACD falls below its signal line.
Similarly, a buy signal occurs when the MACD rises above its signal line. It is also
popular to buy/sell when the MACD goes above/below zero.
Some traders will use MACD as an overbought and oversold
indicator. When using the indicator in this manner, when the shorter moving average pulls
away dramatically from the longer moving average (i.e., the MACD rises), it is likely that
the security price is overextending and will soon return to more realistic levels. MACD
overbought and oversold conditions vary from security to security.
The other way some traders use MACD is to spot divergences from
an anticipated movement. Since there are no indicators or patterns that work all the time,
reactions against the anticipated move can signal a major move. A bearish divergence
occurs when the MACD is making new lows while prices fail to reach new lows. A bullish
divergence occurs when the MACD is making new highs while prices fail to reach new highs.
Both of these divergences are most significant when they occur at relatively
overbought/oversold levels.
The moving average crossover method calculates two moving
averages, each based on a different number of periods of trading data. When the
shorter-term (fewer days) average crosses above the longer-term average from below, this
is a buy signal. When the shorter-term average crosses below the longer-term average from
above, this is a sell signal.
Let's look at General Electric, GE
>From May 24 through today, June 15, GE has been trading in a
trading range between 100 and 105 �. Notice how the MACD indicator produced some reliable
Buy and Sell signals during this time period. Support and resistance in GE would be 100
and 105 �.
Today, June 15, GE once again hit resistance and started moving
down again. The MACD indicator gave a Sell signal at the end of the day. The stock should
continue this down pattern if this signal is going to be as good as the others.
I would Sell Short GE as long as it does not gap up above 105 �
at the open. I would place a stop and reverse at 106. If GE breaks 106, not only would I
want to have my Short position stop me out, but it would be a channel breakout of
resistance, I would want to be long GE.
