One day does not make a trend change, but you need one day up before you can
have two days up.
Many stocks are giving MACD Buy signals and are down significantly from the
recent July 17 NASDAQ highs.
Let’s look at one using the MACD indicator and please note the Moving
Averages too.
MACD “Moving Average
Convergence/Divergence”
The 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-period and 12-period 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.
Let’s look at Stratos Lightwave (NASDAQ:
STLW).
On July 24, both the MACD and moving average methods flashed Sell signals on
STLW.
STLW dropped almost 30% in the past week.
Friday’s low was a previous support of July 14, 2000 and today, July 31,
2000 STLW opened up and closed near its high.
Another pattern that we do not feature in this column, but I like to trade
is a stock that has a least 3 days during which it does not trade higher than
the previous day high and then the stock does trader higher and does not
trade as low as the previous day low. STLW fits this pattern.
I look for STLW to continue higher.
I would Buy STLW on an unchanged or up opening.
I would place a stop at 34.
Do not buy if it gaps down.
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