Sunday, April 5, 2009

Using The MACD

The above chart shows my interpretation of the MACD for the QQQQ since October 2008 according to the methods explained in Gerald Appel's (the inventor the MACD) book "Technical Analysis".

After being in a strong downtrend in September and October, the MACD gave a positive divergence buy signal on 11/25/08. Entering long on the open the next day at 27.88, traders would have remained long until hitting the downtrending 50dema on 1/2/09 with an exit on the open the next day at 30.82 for a profit of 10.55%.

With the 50dema still in a downtrend, the next signal is a short on 1/13/09, entry at 29.17 and stop above the 1/6/09 high. Traders should not have been stopped out as the stop should have been placed more than 0.10 to 0.25 above the high. A second short signal on 2/17/09, entry at 29.41 and stop above the 2/10/09 high, gave a chance to add to short positions or to initiate new ones for those that missed the first one. While there was significant talk at the time about about much lower lows for the indexes, the inability of the Qs to penetrate below the 11/20/09 low was a strong indication to cover short positions. Exiting on the open on 3/10/09 at 26.26 gave a profit of 9.98% and 10.70% resectively.

The last signal occured on 3/12/09 and was a positive divergence buy signal, entry at 28.68 and stop below the 3/9/09 low. The purists who might say that this was not a positive divergence because the March low did not go below the November low are missing the big picture. The Qs did form a positive divergence with the October low, and since almost every other major index did fall below the November lows and also had positive divergence buy signals, the signal for the Qs is valid. The Qs are currently at 32.35 and up 12.80% for a compounded return of 37.15% since November.

From Appel's book, "If there are no negative divergences ...., you can bypass the first sell signal that takes place." Appel also advises using a 19-39-9 MACD for selling and trailing a stop at the 50dema. I have not found the 19-39 to be that useful, although it does work. So traders should be content to ride out this trend as the 50dema has turned up. Rather than trailing a stop right at the 50dema, traders can use a ratchet stop. The stop should be placed under the last swing low that successfully tests the 50dema after a breakout to new rally highs.

Alternatively, traders may want to take all or partial profits at the currently declining 200dema, and look to re-enter long positions at the 50dema. A careful examination of the volume and market action as the 200dema is approached can help with the decision making, but plan what you're going to do ahead of time.

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Good trading next week.

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