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"
MACD 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.
We are looking at 60-minute charts below.
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 histogram, and the
red moving line is the signal line.
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.
Let’s look at Visual Networks (NASDAQ: VNWK).
Sometimes when a stock has bad news coming, the indicators will precede the
drop.
After the drop, an indicator like MACD can help to find a point to get back
in for a possible reversal.
At noon on February 2, 2000, VNWK signaled a MACD Sell signal at 66 �.
Over the next few days, VNWK dropped precipitously to under 48.
Today at 2:00 PM EST, VNWK had a MACD Buy at 52.
A Short should have closed out and a long established at this time.
I still believe that this could be a buying opportunity.
I would Buy VNWK at 53.
I would place my stop at 51.
