Download macd convergence – divergence oscillator indicator

FEBRUARY 8, 2014
IBD MEETUP/NORTHRIDGE
LETS MEETUP TO DISCUSS FIRST
QUARTER 2014 INVESTMENT
STRATEGY
CONVERGENCE – DIVERGENCE OSCILLATOR INDICATOR
MACD
MACD INDICATOR
• MACD
– Popular Moving Average Convergence Divergence indicator.
• A trend-following indicator developed by Gerald Appel in the 70's.
• The theory is when two moving averages cross, a significant change
of trend in the stock's price is more likely to occur.
• The moving average crossover is not a "sure thing" and should not
be considered an absolute truth as you trade stocks.
– Appel attempted to improve on that concept by using 3
Exponential Moving Averages to form 2 indicator lines.
• MACD plots the point spread between 2 different Exponential
Moving Averages-a slower and a faster one. This is the first line.
• Then, a second Exponential Moving Average is plotted against the
first. This is very similar to Stochastic.
• It can also be plotted as a histogram or bars, like Volume and Balance
of Power are commonly used.
• MACD was originally designed for long-term investing not
short-term trading, although short-term traders have
attempted to adopt it for such use. It is frequently misused
and often misunderstood. Its popularity is its own worst
enemy, as it is relatively easy for large lot traders to trade
against the masses of retail traders using it.
• Note: If you have been trading for a long time, you have
probably used this indicator. You may even consider it an
excellent indicator for stocks. It is important for every trader
to understand both the drawbacks and rewards of any
indicator or strategy.
• Professional technical market analysts agree that MACD
requires experience and judgment to use as Appel intended.
Gerald Appel doesn't recommend its use as a purely
mechanical indicator. Unfortunately, it has been made
extremely popular for average traders and investors by
several charting software programs that use it for that
purpose.
• Most professional technical analysts agree that MACD's primary
problems are that it frequently whipsaws and it lags price action
in stocks. Testing by experts over a 72-year period shows that it
is barely better than the buy-and-hold method for long-term
investing. On the short side, experts determined that trading
profits would have been cut by 84% using MACD for entry and
exit signals. This is based upon the MetaStock testing rules for
MACD.
• Because MACD is merely a group of moving averages, which are
inherently lagging, this indicator lags more current indicators
such as Accumulation/Distribution indicators and Volume
Accumulation oscillators. It seldom indicates a buy signal until
after the stock has already moved significantly. MACD is also
known to produce many whipsaw signals, especially in choppy
and sideways markets. This is a common trait of trend-following
indicators
• Note couple days late MACD crossover entry signal
• Candlestick was confirmed with TSV, a volume accumulation
oscillator
• MACD is best for long term analysis to determine if trend is
intact.
MACD CROSSOVERS
• Yellow area shows the MACD
Line in negative territory as 12day EMA trades below 26-day
EMA.
• The initial cross at the end of
September (black arrow);
MACD moved further negative
as 12-day EMA diverged further
from 26-day EMA.
• Orange area highlights positive
MACD values, 12-day EMA was
above 26-day EMA.
• Notice MACD Line remained
below 1 during this period (red
dotted line).
• Means distance between the
12-day EMA and 26-day EMA
was less than 1 point, not a big
difference.
VOLUME INDICATORS
TRADING VOLUME
• Trading Volume
• One factor many consider in prediction of prices
– A measure of quantity of shares that change owners for a given
security
– Fluctuates on any given day depending upon the amount of new
information available about the company
• Large volume represents differences in investor’s view of
valuation based on the new information
– Why consider trading volume and its relationship to prices
1. It adds insight to the structure of financial markets
– Can correlate the rate of information flow in the
marketplace
– The extent that prices reflect public information
– The market size
– The existence of short sales and other market constraints
VOLUME CONTINUED
2. Studies that use a combination of prices and volume
data to draw inferences must understand this
relationship to avoid skewing data.
3. Price volume analyses support the mixture of
distribution hypothesis in that the distribution of
returns exhibit different conditional variances hence
the returned data follows a mixture of distributions
4. Price variability affects trading volume in futures
contracts. This interaction determines whether
speculation is a stabilizing or destabilizing factor on
futures prices.
INTERPRETATION OF INFORMATION
• Volume is a useful tool in determining how much
disagreement exists with the arrival of new
information.
– Anything that causes an investor to react can be
described as information.
– UM study found “in the absence of clear financial
information, investor decisions are swayed by the
aesthetics of financial reports”
– Sometimes information on a company can impact the
volume and price of another unrelated company due to
the sheer similarity of the ticker symbol, i.e. MCI & MCIC
Ying Price Data Study of NYSE/S&P500
• January 1957 to December 1962
– his main conclusions were
• A small volume is usually accompanied by a fall in price
• A large volume is usually accompanied by a rise in price
• A large increase in volume is usually accompanied by a
large price change.
• A large volume is usually followed by a rise in price
• If the volume has decreased (increased) five straight
trading days, the price will tend to fall
(rise) over the next four trading days.
• MACD is all about the convergence and divergence of the two moving averages.
• Convergence occurs when the moving averages move towards each other.
• Divergence occurs when the moving averages move away from each other.
– The shorter moving average (12-day) is faster and responsible for most
MACD movements.
– The longer moving average (26-day) is slower and less reactive to price
changes in the underlying security.
• The MACD Line oscillates above and below the zero line, which is also known as
the centerline.
– These crossovers signal that the 12-day EMA has crossed the 26-day EMA.
The direction, of course, depends on the direction of the moving average
cross.
– Positive MACD indicates that the 12-day EMA is above the 26-day EMA.
– Positive values increase as the shorter EMA diverges further from the
longer EMA.
– This means upside momentum is increasing.
– Negative MACD values indicates that the 12-day EMA is below the 26-day
EMA.
– Negative values increase as the shorter EMA diverges further below the
longer EMA.
– This means downside momentum is increasing.
PRICE-VOLUME RELATIONSHIP
• A Wall Street adage says ”It takes volume to make
prices move.”
– Researchers hypothesized long ago that volume would drive
variability as is supported by many empirical studies.
– The net conclusion was that the absolute price and volume
correlation existed for both equity and futures markets
across all time intervals, although the correlation was often
weak, especially with transactions data.
• The weakness in correlation, however, can be attributed to the fact
that short selling is often more difficult than buying a stock. This
asymmetry causes lower volume in accordance with price
reductions
– Volume is Heavy in Bull Markets, Light in Bear Markets
• Many individuals in finance believe that volume is heavy when the
market is going up, and light when it is going down.
The VOLUME BY PRICE INDICATOR is a technical indicator that
shows amount of volume in a certain price range.
The chart shows SPY with the
volume at price indicator. The
whole bar represent the total
volume at the price for the
given period shown. In the
chart above, the horizontal
bars represents the total
volume at the price from
February to October.
The black color represents the
up volume or positive volume
while the red color represents
the down volume or negative
volume.
•
On Balance
Volume [OBV]
•
Granville theorized that volume precedes
price. OBV rises when volume on up days
outpaces volume on down days. OBV falls
when volume on down days is stronger. A
rising OBV reflects positive volume
pressure that can lead to higher prices.
Conversely, falling OBV reflects negative
volume pressure that can foreshadow
lower prices. Granville noted in his
research that OBV would often move
before price. Expect prices to move
higher if OBV is rising while prices are
either flat or moving down. Expect prices
to move lower if OBV is falling while
prices are either flat or moving up.
The absolute value of OBV is not
important. Chartists should instead focus
on the characteristics of the OBV line.
First define the trend for OBV. Second,
determine if the current trend matches
the trend for the underlying security.
Third, look for potential support or
resistance levels. Once broken, the trend
for OBV will change and these breaks can
be used to generate signals. Also notice
that OBV is based on closing prices.
Therefore, closing prices should be
considered when looking for divergences
or support/resistance breaks. And finally,
volume spikes can sometimes throw off
the indicator by causing a sharp move
that will require a settling period.
TIME SEGMENTED VOLUME (TSV)
The Bottom indicator is TSV, 18 periods, with MA 9 periods. The Middle
is Volume with 50 period MA. The Top is SPY daily chart.
What is Time Segmented Volume (TSV) ?
•
•
•
•
Time Segmented Volume (TSV) is a technical indicator developed by Worden Brothers Inc.
TSV is a oscilator indicator that bounces arround a zero line (thats why this is a oscilator
type indicator). With this indicator we can get the comparison of defined time periods and
the relation between price and volume. When the TSV crosses up above the zero line it
signals a positive accumulation or buying pressure showing the possibility of a bullish state.
On the other hand, if TSV crosses below the zero line it indicates a distribution or selling
pressure where we can enter in a bearish market.
Also we can look for divergences as stated on the site of the creator of this indicator:
"Another important thing to look for when interpreting TSV is a contradiction of trends
between price and TSV. Look for positive or negative divergences between price and TSV
in order to determine potential tops and bottoms. Several consecutive divergences
increase the reliability factor in trying to pinpoint price reversals. For instance, if price has
been making successively higher highs while TSV has been making successively lower
highs, this would constitute a series of negative divergences. This would be an indication of
a possible top.".
Also, is indicated on this site diferent intervals depending on the timeframe or trading style
used:
•
•
Short Term Trading: TSV period between 9 and 12
•
Intermediate Term Trading: TSV period between 18 and 25
•
Long Term Trading: TSV period between 35 and 45
IBD NORTHRIDGE WATCHLIST 2014
TWENTY THREE STOCKS WITH THE S&P-500 [SPY] AS A YARDSTICK
ALR
ETFC MNKD TSLA
AMBA GMCR PPHM TWTR
BITA
ICPT RVBD
UA
BX
LBMH SCTY UBNT
CAMP MDCO SPY
WETF
CSCO
MG
SYR
XRS
WE WILL REVIEW THESE MONTHLY AND NARROW TO A FINAL TEN