Chart for this article can be found by clicking on "My Yahoo Group Site" under the files section.
File name Charts for Article 6.doc
As you may have surmised, I use only the price chart and the MACD when searching for potential trades. In essence I look for 2 things; a divergence combined with a failure swing.
A divergence occurs when price moves in a different direction then the MACD. In figure 1 of the attached file, notice that price of the NASDAQ Index reached a lower low at point B then it previous had at point A. This occurred while the MACD, at corresponding point 1, is higher then it was at corresponding point 2. After this divergence between the MACD and price, the Index moved sharply higher. Bear in mind that this alone would not prompt me to put on a trade.
Normally the term Failure Swing is associated with the Relative Strength Index. For this study I will use the term to define a very specific pattern associated with the MACD. A failure swing occurs when price action forms a reversal pattern while the MACD diverges AND the “fast line” (green line) remains below the “signal line” (white line). Again refer to figure 1, notice the double top which was formed at points C and D. Now look at the MACD in the lower window. Not only did the MACD diverge from price action at corresponding points 3 and 4, it also revealed a “Failure Swing”.
There is one last step I take before I put on the trade; I consult the longer time frames. The chart in figure 1 is a daily chart. Figure 2 is a weekly price chart and figure 3 is a monthly price chart. Notice in Figure 2 at the right hand edge of the chart, the MACD has started to flatten slightly. This provided further support for the trade.
The monthly price chart in figure 3 provides the primary foundation for the trade. The MACD at the far right edge of the chart is moving lower. In addition, it is also leading the price lower. In a later article I will discuss the term “leading the price lower or higher”.
We have now created the most basic framework for my trading style. From this point forward most of my articles will use price chart examples to explore the more detailed intricacies of trading.
Call or email with any questions,
Bob
PS; After reviewing the copied charts, I see that it is difficult to see the MACD flattening in figure 2. To show this more clearly I have added figure 4 which contains the MACD Osc (histogram). Here we can see that the MACD momentum is slowing. Remember from the article titled Introduction to the MACD, the histogram shows a bar graph representation of the distance between the 2 lines.
Tuesday, November 11, 2008
The MACD Indicator
The Moving Average Convergence/Divergence Indicator or MACD has long been revered as the most accurate indicator. As a momentum indicator, the MACD tells us if the price movement is trending as well as the strength and direction of the trend. But more importantly, when use in conjunction with a price chart it has the uncanny ability to identify tops and bottoms with almost perfect accuracy. Of course one must learn to speak its subtle language.
The MACD can be used with any time frame from a 15 minute price chart to a monthly price chart. By fully understanding the MACD, a trader or investor can develop an excellent trading or investing plan. What’s more, this indicator works for all price charts I have studied, from stocks to futures to currencies. It is not necessary to know how this indicator is computed. You only need to know how to use it properly.
The MACD is normally comprised of 2 lines, the fast line and the slow line. I will refer to the slow line as the signal line. At times the indicator will include a “histogram” or bar graph representing the distance between the 2 lines. In addition, the histogram indicates which line is on top. I do not normally use the histogram and do not include it in my charting. If I cannot tell what is occurring using the 2 lines of the basic MACD, I do not trade.
The slope and relationship of these 2 lines tell us what is happening to price momentum and at times what is likely to happen in the future. Keep in mind the MACD cannot predict every price reversal but the reversals that it does forecast can be exceptionally accurate when it is taken into context with the general market. By this I mean if the Dow Jones Industrial Average, the S&P 500 and NASDAQ indexes are trending higher, a MACD “up signal” issued for an individual stock will almost always be accurate. The opposite can be said as well; in a down market a MACD “down signal” issued for a single equity is almost always correct.
The MACD can be used with any time frame from a 15 minute price chart to a monthly price chart. By fully understanding the MACD, a trader or investor can develop an excellent trading or investing plan. What’s more, this indicator works for all price charts I have studied, from stocks to futures to currencies. It is not necessary to know how this indicator is computed. You only need to know how to use it properly.
The MACD is normally comprised of 2 lines, the fast line and the slow line. I will refer to the slow line as the signal line. At times the indicator will include a “histogram” or bar graph representing the distance between the 2 lines. In addition, the histogram indicates which line is on top. I do not normally use the histogram and do not include it in my charting. If I cannot tell what is occurring using the 2 lines of the basic MACD, I do not trade.
The slope and relationship of these 2 lines tell us what is happening to price momentum and at times what is likely to happen in the future. Keep in mind the MACD cannot predict every price reversal but the reversals that it does forecast can be exceptionally accurate when it is taken into context with the general market. By this I mean if the Dow Jones Industrial Average, the S&P 500 and NASDAQ indexes are trending higher, a MACD “up signal” issued for an individual stock will almost always be accurate. The opposite can be said as well; in a down market a MACD “down signal” issued for a single equity is almost always correct.
Monday, October 27, 2008
Fundamentals
The term fundamental can be defined by the word “basic”. When we speak of economic fundamentals, we are referring to the basic ability of a government, private entity or individual to perform financially. I will leave the discussion of “government fundamentals” for a separate article given its complexities.
Firs,t let’s look at the fundamental or basic concept of performance. More simple put financial performance can be defined as the creation of wealth. Wealth in general, only comes from 2 sources, the first and by far the most important concept of wealth creation can be summed up in the following statement: All wealth is created from the efforts of individuals. This is to mean that each of us, through our efforts, can add value to the natural resources which are available to us. Hence, through our combined labor we can create an automobile from iron and hydrocarbons (plastics) or build Hover Dam from concrete and steel. Second, natural resources must be readily available for individuals to exploit. Notwithstanding any societal philosophies which impact the work ethic.
Entities such as companies and corporations are simply vehicles which have been created to foster the ability for individuals to create wealth. In modern economics, these entities are forced to operate in accordance with current nation laws. If these “national laws “are not congruent across borders, entities operating in certain nations will gain an advantage. A case in point can be seen throughout Asia. China’s laws do not require their economic entities to adhere to the strict social and environmental laws of Western Societies. This of course gives them an edge over Western entities. As a result, all “developed” nations have see production (the creation of wealth) move to these less restrictive environments.
This phenomenon is referred to as “economic globalization”. Its roots date back to the end of WWII but the rate of growth has increased significantly over the past two decades. The results, at least so far, have been an increase in the world’s standard of living with the lion’s share going to the United States. This again is related to WWII. During the war, the US Government bought several hundred million dollars worth of war materials from US companies. This fueled the development of our “Nation’s Industrial Complex” which after the war, was used to generate the greatest concentration of wealth in the history of man. More importantly it was amassed in the United States. This was the only possible outcome given that the rest of world’s infrastructure had been destroyed in the war from Europe to Asia to Russia.
At the close of the war, the US provided materials, capital and personnel to rebuild Japan and Europe. This was not only the birth of today’s “developed” nations but the birth of economic globalization as well. You may recall the United States was fairly well entrenched in isolationism before it got involved in WWII.
From the end of the war until the 90s (some might argue the 80s) the US continued to create and accumulate wealth. At some point in the 80s or 90s a sufficient percentage of production had moved offshore to reverse this process. Since then the US has been consuming more wealth then it has simultaneously created. This has been made possible by the producing (developing) nations willingness to finance our excess consumption. They have been willing to do this primarily for two reasons. First, it transfers wealth from the US to these nations and second they trust that the US government will maintain its ability to tax sufficient wealth from its populous to repay any debt it incurs.
While personal deficit spending can continue for an unknown period of time, at some point the wealth will be gone and the consumers will have to return to the reality of “make a dollar, spend a dollar”. This said, the credit freeze will continue to make its way to the consumer as mortgages and auto loans become more difficult to qualify for. I believe that eventually credit cards will be affected as well as lenders become more selective in who they are willing to do business with.
If the above scenario becomes a reality, the current recession may prove to be quite long.
The current financial crisis may actually be creating a silver lining. It has prompted the world governments to take unprecedented action in an effort to free up the credit markets. If these endeavors prove highly successful the recession may turn out to be shorter than predicted.
Either way the stock market will be the leading indicator. As I pointed out in today’s market assessment, the long term technical indicators are still very weak. The Market has been falling for 12 months; a rapid reversal from the current lows is unlikely. What’s more fast reversals have historically been short lived and have usually been followed by further weakness.
Firs,t let’s look at the fundamental or basic concept of performance. More simple put financial performance can be defined as the creation of wealth. Wealth in general, only comes from 2 sources, the first and by far the most important concept of wealth creation can be summed up in the following statement: All wealth is created from the efforts of individuals. This is to mean that each of us, through our efforts, can add value to the natural resources which are available to us. Hence, through our combined labor we can create an automobile from iron and hydrocarbons (plastics) or build Hover Dam from concrete and steel. Second, natural resources must be readily available for individuals to exploit. Notwithstanding any societal philosophies which impact the work ethic.
Entities such as companies and corporations are simply vehicles which have been created to foster the ability for individuals to create wealth. In modern economics, these entities are forced to operate in accordance with current nation laws. If these “national laws “are not congruent across borders, entities operating in certain nations will gain an advantage. A case in point can be seen throughout Asia. China’s laws do not require their economic entities to adhere to the strict social and environmental laws of Western Societies. This of course gives them an edge over Western entities. As a result, all “developed” nations have see production (the creation of wealth) move to these less restrictive environments.
This phenomenon is referred to as “economic globalization”. Its roots date back to the end of WWII but the rate of growth has increased significantly over the past two decades. The results, at least so far, have been an increase in the world’s standard of living with the lion’s share going to the United States. This again is related to WWII. During the war, the US Government bought several hundred million dollars worth of war materials from US companies. This fueled the development of our “Nation’s Industrial Complex” which after the war, was used to generate the greatest concentration of wealth in the history of man. More importantly it was amassed in the United States. This was the only possible outcome given that the rest of world’s infrastructure had been destroyed in the war from Europe to Asia to Russia.
At the close of the war, the US provided materials, capital and personnel to rebuild Japan and Europe. This was not only the birth of today’s “developed” nations but the birth of economic globalization as well. You may recall the United States was fairly well entrenched in isolationism before it got involved in WWII.
From the end of the war until the 90s (some might argue the 80s) the US continued to create and accumulate wealth. At some point in the 80s or 90s a sufficient percentage of production had moved offshore to reverse this process. Since then the US has been consuming more wealth then it has simultaneously created. This has been made possible by the producing (developing) nations willingness to finance our excess consumption. They have been willing to do this primarily for two reasons. First, it transfers wealth from the US to these nations and second they trust that the US government will maintain its ability to tax sufficient wealth from its populous to repay any debt it incurs.
While personal deficit spending can continue for an unknown period of time, at some point the wealth will be gone and the consumers will have to return to the reality of “make a dollar, spend a dollar”. This said, the credit freeze will continue to make its way to the consumer as mortgages and auto loans become more difficult to qualify for. I believe that eventually credit cards will be affected as well as lenders become more selective in who they are willing to do business with.
If the above scenario becomes a reality, the current recession may prove to be quite long.
The current financial crisis may actually be creating a silver lining. It has prompted the world governments to take unprecedented action in an effort to free up the credit markets. If these endeavors prove highly successful the recession may turn out to be shorter than predicted.
Either way the stock market will be the leading indicator. As I pointed out in today’s market assessment, the long term technical indicators are still very weak. The Market has been falling for 12 months; a rapid reversal from the current lows is unlikely. What’s more fast reversals have historically been short lived and have usually been followed by further weakness.
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