MACD
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.
As the market is declining fast and although I do not like to try to catch
a falling knife, there has been some signs of life in a few companies.
We are very oversold with the decline of the past few weeks, and for Day
traders, a bounce of a few days, can be very profitable.
Let's look at Applied Materials, AMAT.
Not all MACD signals work as well as the last few on AMAT.
As you can see from the chart below, each time the MACD histogram bars rose
above the signal line, AMAT had a rise in stock prices.
When the histogram bars declined below the MACD signal line AMAT had a
decline.
The most recent downturn was a minor correction and retraced about 50% of
the move from July 27 through July 28.
AMAT found support in the 71-� area and is now moving up again in a
very turbulent market.
On any morning strength in AMAT, I would be a buyer.
I would place a stop at 71 �.
