Solid Breakout

Today's breakout confirms the uptrend and traders should be long this market. The trend may not be straight up, and there may be opportunties over the next week to get in at or near the breakout levels. The action today in the Qs puts QQQQ investors in the black for the year as the Qs closed above the January highs. It is hard to imagine a scenario at this point which would compel investors to throw in the towel. Even a bad employment report tomorrow, if it leads to a down open, should be a buying opportunity. Resistance lies ahead at the 200demas, but I don't think this market will slow down too much until the Dow hits its 200dema at around 9000.

So far today, we've had four big news events: 1) FASB relaxes the mark-to-market accounting rules for financial institutions, but the financials didn't move too strongly, perhaps the news was baked in, 2) the Dow Transports powered ahead for a gain of 7.85%, this alone is enough to send the bears packing, 3) the IMF plans to sell 403 tonnes of gold, but gold still holds its March low, which is mildly bullish, and 4) RIMM beats its earnings estimates, offers a better outlook and is up 20% after hours, which should keep the Qs heading higher tomorrow.

RIMM broke out today above the high of the low month, March, but I am not going to buy the day of earnings before the report is out. I'll just let this one go or wait for a better opportunity later on. You can't judge a trade by what happens afterward, only by what was evident beforehand.

One interesting thing occured today that was a little unusual. The TRIN moved decisively higher with the market. My take on this is that there was a definite campaign to sell the market as it went higher. Given the fact that it held up, the short sellers should add more fuel to the rally as they cover in the days ahead.

A Marketclub blog post went out yesterday discussing the MACD. I don't want to be critical of others' work, and I understand the point that the writer was making, but I cannot disagree more with his conclusions. He was basically saying to fade MACD signals because the MACD is too closely followed and doesn't work anymore. This may work for short term countertrend traders, but I can assure you that the MACD is not broken any more than the market is broken.

The MACD is just a reflection of market action as measured by the moving averages. To say that the MACD is broken is to say that somehow the market is behaving differently than it ever has. Sure, market behavior varies, but it's basic behavior has not changed since it has been in existence because people have not changed. The only thing that has really changed is the volatility in recent years.

The reason the author concluded that the MACD was broken is that he left out one crucial element to using it successfully: a trend indicator, usually the 50dema. Signals must be taken in the direction of the trend indicator, and not against, unless there is a valid divergence. I can assure you that if you will add that one element to the MACD, you can be very successful with it.

As an example, the Dow Industrials were trading under a downtrending 50dema in January when the MACD gave a sell (short) signal on January 12th. If you ignored the next buy signal, as recommended by Gerald Appel in his book and took the second buy signal on March 11th, which formed a positive divergence with the October low, you would have made 1542 Dow points. This is equal to 18.20% on the cash index, or $7,710 per Dow mini contract. You would have been short 5 days after the January high and out 4 days after the March low. I don't know about you, but I don't call that broken.

In addition, if you had gone long based on the positive divergence, you would now be up 1045 Dow points, 15.08%, or $5,225 per mini contract. Thus, a trader using the MACD and only trading the Dow this year would be up $36,000 in an unleveraged $100,000 cash account, or $38,805 in a $100,000 futures account trading a very conservative 3 contracts, which would have required a risk of about $9,210.

Traders must realize that it is not the indicators that make a trader successful, but a keen understanding of how the market and the indicators work. Understanding the markets requires hard work and a developed vision derived from years of experience. If your trades aren't working, it is probably not the indicator.