MACD

M OV I N G AV ERAGE CON V ERGEN CE- D I V ERGEN CE ( M ACD ) A M a r k e t Tim in g I n dica t or The Mov ing Av erage Convergence- Divergence or MACD t im ing m odel, invent ed by Ger ald Appel dur ing t he lat e 1970’s, has becom e one of t he m ost popular of m arket t echnical t ools, em ploy ed by short and longer t er m invest ors in st ock, bond and ot her invest m ent m arket s. MACD is a feat ured indicat or on virt ually every com put er - based t echnical t rading program and t rading plat form . MACD is, indeed, an indicat or for all seasons. I f m ont hly dat a is m aint ained, MACD m ay be em ployed for t he analysis of longer t erm t rends. I t m ay be applied t o som ew hat short er t im e periods, refl ect ed per haps by weekly or daily dat a, for t he analysis of int er m ediat e and shor t er t er m m ark et t r ends. I t m ay be applied on an int ra- day basis for t im e fram es as short as hours or m inut es –suit able for shor t t erm day t rading purposes. The indicat or is frequent ly capable of producing precise ent ry and exit signals – one of it s st rongest feat ur es, it s abilit y t o det ect t he conclusions of and favorable m arket ent r y j unct ures following serious int er m ediat e m arket declines. St rangely enough, in spit e of it s w idespread use, relat ively lit t le has been writ t en r egarding MACD or of som e of t he best ways in which MACD pat t erns m ay be m aint ained, approached and int erpret ed – all of which we will be considering. SCOPE OF D I SCUSSI ON : There w ill be m any areas covered in our discussion of MACD. First , w e will rev iew t he under lying concept s and const ruct ion of t he m oving average convergence- div ergence indicat or. The chart s rev iew ed will represent varying per iods of m arket hist ory, varying periods of t im e, various MACD com binat ions, and vary ing m arket clim at es. You w ill receive suggest ions as t o t he best of buying, holding and selling MACD pat t erns, t he est ablishm ent of st op loss orders and, of cour se, how t o apply MACD in synergy wit h ot her m arket t ools t hat you hav e learned. Alt hough our discussions will be focusing on MACD in part icular, t he concept s involved are alm ost cert ainly applicable t o t he use of ot her m easures of m arket m om ent um as w ell. Ch a r t 1 I n t r odu cin g t h e M ACD Con ce pt Th e M ACD in dica t or is cr e a t e d by su bt r a ct in g a lon ge r t e r m e x pon e n t ia l m ovin g a ve r a ge fr om a sh or t e r t e r m e x pon e n t ia l m ovin g a ve r a ge of pr ice s or ot h e r m e a su r e s of t h e ve h icle t h a t y ou r a r e t r a ck in g. M ACD w ill ge n e r a lly r ise if sh or t e r t e r m t r e n ds a r e ga in in g st r e n gt h a n d w ill ge n e r a lly de clin e if sh or t e r t e r m t r e n ds a r e losin g st r e n gt h . Th e low e r sca le on t h e ch a r t is a h ist ogr a m w h ich m e a su r e s t h e diffe r e n ce , 1 2 - da y e x pon e n t ia l m in u s 2 6 - da y e x pon e n t ia l a ve r a ge of t h e N e w Yor k St ock Ex ch a n ge I n de x . Chart 1 illust rat es t he const r uct ion and t he basic underly ing concept s of MACD. The price scale is of t he New York St ock Exchange I ndex , daily based. Overlaying t he price scale ar e t wo exponent ial m oving averages – a 12- day exponent ial m ov ing average and a 26- day exponent ial m ov ing aver age. St raight m oving averages m ay be em ployed as an alt ernat iv e, but exponent ial averages are easier t o m aint ain and t rack t rends m ore closely . ( You m ay want t o review t he const ruct ion of ex ponent ial aver ages, Chapt er 6.) As you can see on t he char t , t he short er t er m exponent ial average is m or e sensit ive t o changes in price t rend t han t he longer ter m average, t rack ing m ore closely wit h act ual price m ovem ent . quick ly t han t he longer t er m average. As t he m ark et declines, t he short er t erm average will decline m ore I f pr evious t rends have been rising, t he short er t erm m oving average m ay decline from above t o below t he longer t er m average. As declines cont inue, t he shor t er t er m average will decline furt her and furt her below t he longer t er m av erage. As declines com e t o an end, t he short er t erm average w ill fl at t en, usually prior t o t he longer t erm av erage, w ill t hen m ove upwar ds wit h rising pr ices, crossing and t hen m ov ing above t he longer t er m m ov ing average. The MACD indicat or is calculat ed by su bt r a ct in g t h e lon ge r t e r m e x pon e n t ia l a ve r a ge fr om t h e sh or t e r t e r m e x pon e n t ia l a ve r a ge . MACD m ay be expr essed as a set of bars, or as a line curve, bot h illust rat ed in Chart 1. The level at which t he short and longer t er m m oving average cross, wher e t hey are equal, is t he “ 0” line on t he char t , t he point at which short er and longer t erm t rends are in probably t em porary balance, t he area in which relat iv e st rengt h relat ionships bet ween short and longer t er m t rends oft en rev erse. The great er t he posit ive dist ance bet w een t he short t er m exponent ial av erage and t he longer t erm ex ponent ial average, t he m ore posit ive will be MACD r eadings. The great er t he negat iv e dist ance ( shor t – long) bet w een t he short er and longer t er m ex ponent ial aver ages, t he m or e negat ive w ill be MACD readings. Areas A in t he t op and lower scales of Chart 1 indicat e t he different ial, 12- day short t erm m oving average m inus 26- day longer t erm m oving average. Ba sic Con ce pt s: • • • • • M ACD r e pr e se n t s t h e diffe r e n ce , sh or t t e r m e x pon e n t ia l m ovin g a ve r a ge m in u s lon g t e r m e x pon e n t ia l a ve r a ge . W h e n m a r k e t t r e n ds a r e im pr ovin g, sh or t t e r m a ve r a ge s w ill r ise m or e qu ick ly t h a n lon g t e r m a ve r a ge s. M ACD lin e s w ill t u r n u p. W h e n m a r k e t t r e n ds a r e losin g st r e n gt h , sh or t e r t e r m a ve r a ge s w ill t e n d t o fl a t t e n , u lt im a t e ly fa llin g be low lon ge r t e r m a ve r a ge s if de clin e s con t in u e . M ACD lin e s w ill fa ll be low 0 . W e a k e n in g t r e n ds a r e r e fl e ct e d in ch a n ge s of dir e ct ion of M ACD r e a din gs, bu t cle a r t r e n d r e ve r sa ls a r e n ot u su a lly con side r e d a s con fi r m e d u n t il ot h e r in dica t ion s, w h ich w ill be discu sse d, t a k e pla ce . D u r in g t h e cou r se of pr ice m ove m e n t s, sh or t t e r m m ovin g a ve r a ge s w ill m ove a pa r t ( dive r ge ) a n d m ove t oge t h e r ( con ve r ge ) w it h lon ge r t e r m m ovin g a ve r a ge s – h e n ce , t h e in dica t or n a m e , “m ovin g a ve r a ge con ve r ge n ce – dive r ge n ce ”. W h a t le n gt h m ovin g a ve r a ge s sh ou ld be e m ploye d for M ACD : There ar e no hard and fast rules, alt hough illust rat ions her ein w ill show possible com binat ions. m oving average will be t wo t o t hree t im es t he lengt h of t he short er t erm average. sensit iv e will MACD be t o shor t t er m m arket fl uct uat ions. t he only possibilit y . As a general rule, t he longer t er m The short er t he short er t erm average, t he m ore The 12 – 26 com binat ion shown in Chart 1 is widely em ployed, but hardly I llust rat ive char t s in t his chapt er w ill include var ious MACD com binat ions. TREN D CON FI RM ATI ON : MACD signals are m ore lik ely t o prove reliable if short er t erm MACD signals ar e confi r m ed by longer t er m t rends in t he st ock m ark et , perhaps r efl ect ed by longer t erm MACD pat t erns. For exam ple, purchases m ade based on daily MACD lines ar e m ore likely t o succeed if weekly and/ or m ont hly MACD pat t er ns ar e favorable, indicat ing st rengt h in t he prim ary m arket cy cle. Short t erm shor t sales are m ore likely t o prove profi t able if longer t erm m ar ket t r ends are down. The m aint enance of m ult iple MACD chart s, refl ect ing varying lengt h of m arket cycle, is recom m ended. Ch a r t 2 D ow I n du st r ia ls, 2 0 0 0 I n t r odu cin g t h e Sign a l Lin e Th e sign a l lin e is a n e x pon e n t ia l a ve r a ge of M ACD le ve ls, not of t h e pr ice of t h e inve st m e nt ve h icle or in de x t h a t is be in g t r a ck e d. Sign a l lin e s a r e u su a lly cr e a t e d e m ployin g 3 - da y t o 9 - da y e x pon e n t ia l a ve r a ge s of M ACD lin e s. Th e sh or t e r t h e a ve r a ge t h e m or e se n sit ive w ill be t h e sign a l lin e . Th is ch a r t e m ploys M ACD lin e s ba se d on diffe r e n t ia ls be t w e e n 1 9 – da y a n d 3 9 - da y e x pon e n t ia l a ve r a ge s of t h e pr ice le ve ls of t h e D ow I n du st r ia ls, a n d a sign a l lin e w h ich e m ploys a 9 - da y e x pon e n t ia l a ve r a ge of t h e M ACD lin e . Alt hough changes in MACD direct ion ( from down t o up and vice v ersa) and crossings of MACD lines above and below “ 0” carry signifi cance, crosses of MACD from below t o above it s signal line ( an exponent ial av erage of MACD readings) and from above t o below it s signal line carry addit ional signifi cance of t heir own. As a ge n e r a l r u le , cr ossin gs of M ACD fr om be low t o a bove it s sign a l lin e m a y be t a k e n a s con fi r m a t ion s of bu y sign a ls or igin a lly in dica t e d w h e n ch a n ge s in dir e ct ion h a ve t a k e n pla ce in M ACD fr om dow n t o u p. The above buy and sell signals are subj ect t o furt her condit ions, w hich w ill be shor t ly reviewed, but as a basic rule, r eversals in t he direct ion of MACD carry signifi cance, confi r m ed when MACD crosses it s signal lines. Ch a r t 3 D ow I n du st r ia ls, 2 0 0 0 Confi r m e d Bu y a n d Se ll Sign a ls Ba sic bu y a n d se ll sign a l con fi r m a t ion s ge n e r a t e d a s M ACD cr osse s fr om be low t o a bove a n d fr om a bove t o be low it s signa l line . MACD buy signals, confi rm ed by signal line crossings, are illust rat ed in Chart 3. You m ay not ice t hat signal line crossings t ak e place a ft e r MACD lines change direct ion but usually be for e MACD lines have crossed t he “ 0” line. My resear ch ov er t he years has suggest ed t hat great er net gains generally occur if r eversals in MACD ( especially slow er m oving com binat ions) are em ployed for buying and selling rat her t han crossings of signal lines. However, using changes in direct ion of MACD w it hout signal line confi rm at ion does produce larger num bers of t r ades, wit h at t endant ext ra ex penses. You m ay not ice on Chart 3 t hat , by and large, you would have secured slight ly m ore favorable ent r ies and exit s during t he period shown if you had act ed on changes in direct ion of MACD r at her t han await ing signal line crossings but t hat crossings of t he signal line did produce m ore im m ediat ely pr oduct ive signals t han sim ple changes in MACD dir ect ion. Ve r y im por t a n t su pple m e n t a r y bu y a n d se ll r u le s – • • • Bu y sign a ls a r e m u ch m or e r e lia ble w h e n M ACD h a s cr osse d fr om a bove t o be low “0 ” a t som e t im e sin ce t h e m ost r e ce n t se ll sign a l. M ACD doe s n ot h a ve t o be be low “0 ” a t t h e t im e of t h e bu y sign a l bu t sh ou ld h a ve be e n be low “0 ” a t som e t im e sin ce t h e st a r t of t h e r e ce n t de clin e . Se ll sign a ls a r e m or e r e lia ble w h e n M ACD h a s cr osse d fr om be low t o a bove “0 ” a t som e t im e sin ce t h e m ost r e ce n t bu y sign a l. M ACD doe s n ot h a ve t o be a bove “0 ” a t t h e t im e of t h e se ll sign a l bu t sh ou ld h a ve be e n a bove “0 ” a t som e t im e sin ce t h e st a r t of t h e m ost r e ce n t a dva n ce . D u r in g ve r y st r on g m a r k e t pe r iods, u su a lly du r in g t h e e a r ly a n d be st st a ge s of bu ll m a r k e t s, M ACD w ill r e t r e a t du r in g m a r k e t r e a ct ion s, t o a le ve l j u st a bove “0 ”, in w h ich ca se y ou ca n sh a de t h e a bove r u le s a bit a s you m igh t if M ACD t ops ou t j u st be low “0 ” du r in g a be a r m a r k e t or se ve r e in t e r m e dia t e de clin e . M ost oft e n , h ow e ve r , t h e “0 ” cr ossin g con dit ion sh ou ld be r e spe ct e d. Chart s in t his Chapt er illust r at e m any occasions when MACD lines change direct ion and/ or cross abov e and below t heir signal lines in t he process of t racing out declines from above t o below “ 0” and from below t o above “ 0” , such crossings frequent ly of lit t le signifi cance. As a general rule, it is best t o sell posit ions follow ing m arket m ovem ent s which t ak e prices from over sold t o overbought lev els and t o buy new posit ions during periods t hat t he m ark et has becom e oversold, or at least som ew hat ext ended t o t he dow nside. By wait ing for MACD t o fall below “ 0” for buying and t o rise above “ 0” for selling, you are set t ing up procedur es by which you “ buy weakness” and “ sell st r engt h” , rat her t han buying and selling on every change in m inor t rend. USI N G D I V ERGEN CES TO RECOGN I ZE TH E M OST RELI ABLE SI GN ALS: Ch a r t 4 D ive r ge n ce Confi r m e d Bu y a n d Se ll Sign a ls Bu y a n d se ll sign a ls t h a t a r e a ccom pa n ie d by dive r ge n ce s in dir e ct ion be t w e e n M ACD a n d pr ice t r e n ds a r e u su a lly m or e sign ifi ca n t t h a n bu y a n d se ll sign a ls t h a t a r e n ot a ccom pa n ie d by su ch dive r ge n ce s. N e ga t ive dive r ge n ce s a r e sa id t o t a k e pla ce w h e n pr ice le ve ls of t h e in ve st m en t in qu e st ion r e a ch n e w h igh s bu t m e a su r e s t h a t r e fl e ct u pside m a r k e t m om e n t u m fa il t o r e a ch n e w posit ive a r e a s. Posit ive dive r ge n ce s a r e sa id t o t a k e pla ce w h e n pr ice le ve ls of t h e in ve st m e n t in qu e st ion fa ll t o n e w low s for t h e cycle bu t m e a su r e s t h a t r e fl e ct dow n side m a r k e t m om e n t u m fa il t o de clin e t o m or e n e ga t ive a r e a s. Th e fa ilu r e of m e a su r e s of m om e n t u m t o con fi r m n e w h ighs or ne w low s in pr ice by fa ilin g t o con cu r r e n t ly a ch ie ve n e w pe a k s or n e w low s r e spe ct ive ly in dica t e s a dim in ish in g of m a r k e t t h r u st in it s cu r r e n t dir e ct ion . D ive r ge n ce s su gge st a m or e or le ss im m in e n t m a r k e t r e ve r sa l a h e a d, oft e n of a t le a st in t e r m e dia t e sign ifi ca n ce . We can see on Chart 4 t wo peaks in t he st ock m arket bet ween Oct ober and Novem ber. of price and MACD hav e risen sim ult aneously. At t he fi rst peak, Area 1, Oct ober , levels MACD, a m easure of m om ent um , has confi rm ed t he rise in price. The price level of t he New Yor k St ock Exchange I ndex did, indeed, decline along wit h MACD, but t he decline did not carry very far, was very quick ly rever sed. What happened, howev er, at Area 2? The price lev el of t he NYSE Com posit e I ndex adv anced t o a higher recov ery high, but t his high in pr ice w as unconfi r m ed by MACD, w hich failed t o reach a new high along w it h pr ice. This failure of MACD t o confi r m t he new price high was a negat ive div ergence, suggest ive of a m ore ser ious decline which, in fact , did t ake place. The decline cont inued int o Ar ea 3. ( You m ight not ice t he angle change, not m ark ed on t he chart , decline which provided an alm ost perfect proj ect ion of it s ult im at e ex t ent .) t hat t ook place during t he An init ial buy signal t ook place at t he end of Novem ber , follow ing declines in bot h price and m om ent um t o new MACD- price confi r m ed lows. The St ock m arket t hen declined t o Area 4, at which t im e t he NYSE Com posit e reached a new low area. What about MACD? At a t im e t h a t pr ice w a s fa llin g t o a n e w low , M ACD pa t t e r n s fa ile d t o do so! A posit iv e divergence hadvbdeveloped, suggest ing condit ions t hat favored a m ore ext ended m arket recovery which, in fact , did t ake place. Ch a r t 5 Fu r t h e r Ex a m ple s of D ive r ge n ce s Th e a r e a be t w e e n 6 – 7 r e pr e se n t e d a st r on g posit ive dive r ge n ce be t w e e n M ACD a n d pr ice m ove m e n t . Th e a r e a be t w e e n 8 – 9 r e pr e se n t e d a st r on g n e ga t ive dive r ge n ce w h ich did, in fa ct , cor r e ct ly for e t e ll t h e e n d of a m a r k e t a dva n ce w h ich , h ow e ve r , w a s n ot , in t h is ca se , follow e d by a n im m e dia t e de clin e of sign ifi ca n ce . A 6 – 1 9 da y e x pon e n t ia l M ACD is e m ploye d in t h is ch a r t . ( D iffe r e n t M ACD pa r a m e t e r s a r e e m ploy e d in t h is ch a pt e r t o illu st r a t e t h e a ppe a r a n ce of sh or t t e r m , in t e r m e dia t e t e r m a n d lon ge r t e r m M ACD com bin a t ion s. To som e e x t e n t , t h is m a y a ppe a r t o con t r a dict som e of t h e r u le s of ope r a t ion t h a t I su gge st be follow e d, bu t a s a ge n e r a l r u le diffe r e n t ia ls in e n t r y a n d e x it le ve ls a r e n ot con side r a ble .) Addit ion a l Ex a m ple s – Chart 5 provides addit ional exam ples of posit ive and t hen negat ive diver gence bet ween price m ovem ent and m arket m om ent um . An MACD buy signal at Area 6 was unaccom panied by a posit ive divergence so t he failure of t he subsequent advance t o cat ch was not all t hat unusual. How ever, a secondary buy signal at Ar ea 7 was accom panied by a posit ive div ergence – not e t he confl ict ing t r ends bet w een pr ice and m om ent um in t he area – and, t herefor e, bet t er grounded. The subsequent advance proved very t radeable. The advance essent ially ended in Area 8 when MACD produced a w ell t im ed sell signal. However, a double t op in price at Ar ea 9 ( slight new high) accom panied by a negat iv e divergence ( clear declining t op in MACD) r einfor ced t he likelihood of m ore signifi cant m arket weakness. The im plicat ions of t his negat ive diver gence were not , how ever, act ualized for sev eral weeks. The bear ish port ent s of t he negat ive diver gence were, perhaps, a bit prem at ure but it m ight be k ept in m ind t hat t he onset of t he year 2000 bear m arket was only week s away ….. I M PROVI N G M ACD SI GN ALS BY EM PLOYI N G D I FFEREN T M ACD COM BI N ATI ON S FOR BUYI N G AN D FOR SELLI N G: Ch a r t 6 D iffe r e n t M ACD Com bin a t ion s for Bu yin g a n d for Se llin g M or e a ccu r a t e M ACD bu y a n d se ll sign a ls ca n oft e n be se cu r e d by u sin g m or e se n sit ive M ACD com bin a t ion s for bu yin g pu r pose s a n d le ss se n sit ive M ACD com bin a t ion s for se llin g pu r pose s. Tw o M ACD com bin a t ion s a r e oft e n be t t e r t h a n on e – I nasm uch as st ock prices do decline at m ore rapid rat es t han t hey rise, it is generally a good pract ice t o em ploy at least t wo, and perhaps even t hree, MACD com binat ions – different com binat ions for buying and for selling. Chart 6 em ploys t hree elem ent s new t o our discussion of MACD. For exam ple, let us review Chart 6. Fir st , t here is a st raight , not exponent ial, 50- day m oving average which we w ill em ploy t o defi ne m arket t r end, act ually a som ew hat subj ect ive exercise. As a general r ule, we shall presum e t hat t he pr evailing m arket t rend is at least neut r al and possibly bullish if t he 50- day m oving average is eit her rising or essent ially fl at . If t he 50- day av erage is clearly declining, t hen we will assum e t he m arket t r end is down. The chart has t wo scales in it s lower half. The upper scale represent s an MACD line creat ed w it h differ ent ials bet ween a 12- day and a 26- day exponent ial m oving average, along w it h a signal line, creat ed via a 9- day exponent ial av erage of t he MACD line. The low er scale represent s an MACD line, creat ed from t he different ial bet ween a 19- day and a 39- day exponent ial m oving average. This MACD is less sensit ive t o m inor m arket fl uct uat ions t han t he fast er m oving, 12 – 26 day MACD com binat ion. The use of ot her MACD com binat ions is very feasible, of course, but I h a ve fou n d t h a t t h e u se of t h e 1 2 - 2 6 da y M ACD com bin a t ion is ge n e r a lly fi n e for t h e ge n e r a t ion of bu yin g sign a ls a n d t h a t t h e u se of t h e 1 9 – 3 9 da y M ACD com bin a t ion is ge n e r a lly fi n e for t h e ge n e r a t ion of M ACD se ll sign a ls, pr ovidin g t h a t t h e ge n e r a l m a r k e t clim a t e is fa vor a ble t o j u st m ode r a t e ly n e ga t ive . I f m a r k e t t r e n ds a r e ve r y st r on g, t h e n a ve r y se n sit ive M ACD com bin a t ion , pe r h a ps of 6 – 1 9 da ys, m a y be e m ploy e d for bu yin g, pr ovidin g m or e r a pid e n t r ie s t h a n t h e 1 2 – 2 6 da y com bin a t ion . Th e 1 9 – 3 9 da y com bin a t ion r e m a in s a s t h e se llin g sign a l. I f m a r k e t t r e n ds a r e ve r y w e a k , t h e n y ou w ou ld con t inue t o bu y on t h e 1 2 – 2 6 da y com bin a t ion bu t you m igh t a lso e m ploy t h a t com bin a t ion for se llin g. A review of Chart 6 should clarify t he rat ionales behind t hese rules. A st ock m arket decline carr ied prices down t o oversold lev els in March at which t im e bot h t he 12 – 26 and 19- 39 MACD pat t er ns bot h st ar t ed t o fi rm . As you can see, however , t he m or e sensit ive 12 – 26 MACD com binat ion t raced out bot h a rising double bot t om form at ion ( bullish) and a crossing from below t o above t he “ 0” line in adv ance of t he slower m oving 19 – 39 day MACD com binat ion. I n t his par t icular case, t here was probably not m uch benefi t t o buy ing ear lier t han a few days lat er, but a s a ge n e r a l r u le t h e e a r lie r t h e bu y signa l a t a m a r k e t low t h e be t t e r , pa r t icu la r ly w h e n m a r k e t t r e nds a r e fa vor a ble . confi r m t hat t he MACD com binat ion em ployed for buying has crossed Rem em ber , howev er , t o below “ 0” since t he m ost recent MACD sell signal. Moving along now, int o May , we can see t hat t he 12 – 26 day com binat ion crossed below it s signal line in m id- May , producing a prem at ure sell signal com par ed t o t he slower m oving 19 – 39 day com binat ion. I n t his part icular case, again, differ ent ials of price levels w ere not signifi cant bet ween t he fast er and slow er signals but w e can see t hat t he slower m oving 19 – 39 day com binat ion did bet t er in allowing t he m ark et advance t o run it s full cour se. We will be review ing addit ional chart s t hat illust rat e t hese concept s. Rem em ber , however, t hat t he MACD line t hat you are using for selling m ust have crossed above “ 0” prior t o generat ing a valid sell signal. To sum up t he golden r ules j ust one m ore t im e. M a in t a in a t le a st t w o M ACD com bin a t ion s – a fa st e r on e ( s) for bu yin g, a slow e r on e for se llin g. W h e n m a r k e t t r e n ds a r e ve r y posit ive , BUY V ERY FAST! SELL SLOW ! You m ay em ploy t he 6 – 19 com binat ion for buying, or you m ay em ploy t he som ew hat m ore reliable 12 – 26 day com binat ion. The 19 – 39 day com binat ion is em ployed for selling. W h e n m a r k e t t r e n ds a r e n e u t r a l t o som e w h a t posit ive , BUY FAST! SELL SLOW ! Use t he 12 – 26 com binat ion for buying. Use t he 19 – 39 day com binat ion for selling. W h e n m a r k e t t r e n ds a r e cle a r ly n e ga t ive , y ou m a y BUY FAST! SELL FAST! You m ay use t he 12 – 26 unit MACD com binat ion for bot h buying and selling, in which case you w ill som et im es be selling before t he slow er m oving 19- 39 day MACD has crossed from below t o above “ 0” . However, unless a “ st op- out ” t akes place, t he 12 – 26 MACD lines should generally rise abov e “ 0” as a precondit ion for a sell t o occur . M ACD du r in g st r on g m a r k e t u pt r e n ds ( st e a dily r isin g m ovin g a ve r a ge s, la st in g u pt r e n ds in pr ice t r e n d, fa vor a ble br e a dt h , a n a bilit y of m om e n t u m in dica t or s t o r ise t o ove r bou gh t le ve ls e t c.) - Ch a r t 7 M ACD D u r in g St r on g M a r k e t Upt r e n ds M ACD is a n e x ce lle n t t im in g in dica t or , bu t it is n ot pe r fe ct . Th e r e a r e t im e s du r in g st r on g st ock m a r k e t u pt r e n ds t h a t M ACD w ill pr odu ce pr e m a t u r e se ll sign a ls. You m a y n ot ice , h ow e ve r , t h a t t h e u se of a slow e r M ACD com bin a t ion pr odu ce d m or e t im e ly se ll sign a ls t h a n if t h e m or e r a pid M ACD com bin a t ion , e x ce lle n t for bu yin g du r in g t h is pe r iod, w a s e m ploy e d for se llin g a s w e ll. Sign a l lin e s in t h e ch a r t r e fl e ct 9 - da y e x pon e n t ia l a ve r a ge s of M ACD le ve ls. Chart 7, t he New York Com posit e I ndex, April – Nov em ber , 1997, illust rat es an occasional pit fall of MACD, t he generat ion of sell signals t oo ear ly during st rong and last ing m arket advances. This does not , by any m eans as w e shall see, alway s t ake place, but t her e are t im es when it does. The chart also illust rat es t he benefi t s of em ploying m ult iple MACD com binat ions, rapid com binat ions for buying, slower com binat ions for selling. The sensit iv e 6 – 19 day MACD com binat ion generat ed an excellent ent ry during Apr il of 1997 – an ent ry well in advance of a buy ent ry t hat m ight hav e been generat ed by t he slower 19 – 39 MACD com binat ion. com binat ion w ould hav e developed rapidly . June. The st ock m arket Sell signals, how ev er, based upon t his rapid The slower 19 – 39 day MACD com binat ion did not produce a sell signal unt il t he end of adv anced furt her, int o t he end of July , but act ually a new buy signal ( based on t he m ore rapid 6 – 19 com binat ion) did produce a re- ent ry j ust slight ly abov e t he level of t he June ex it . The sell signal t hat t ook place in Oct ober was well enough t im ed, refl ect ing once again t he benefi t of using slower MACD com binat ions for selling. MACD during strong Downtrend Ch a r t 8 M ACD du r in g a M a r k e t D ow nt r e n d M ACD oft e n h a s diffi cu lt y pr odu cin g pr ofi t s on t h e lon g side du r in g m a r k e t dow n t r e n ds, bu t in a sm u ch a s se ll sign a ls t e n d t o be m or e a ccu r a t e , ca n oft e n pr odu ce fa vor a ble r e su lt s for sh or t se lle r s. Chart 8 show s t he perform ance of MACD during a m arket downt rend. Buy signals dur ing t his period were not part icular ly product ive, t rading against t he t rend, but , on t he ot her hand, did not result in losses of consequence. Sell signals ( which m ay also be em ploy ed for short selling) were product ive. Two MACD com binat ions are shown on t he chart – a 12 – 26 which is being em ployed for buying and a 19 – 39 day com binat ion for selling. During m arket downt r ends, it is oft en preferable t o em ploy a m or e rapid ex it or sell st rat egy w hich can be im plem ent ed by using a m or e sensit ive MACD com binat ion for selling. I f y ou review t he chart carefully , you m ay be able t o ident ify all t hose areas in which a m or e rapid sell, based upon t he 12 – 26 day MACD com binat ion, would have out perfor m ed slow er developing sell signals shown t hat were based upon t he 19 – 39 day MACD com binat ion. Re m e m be r , du r in g dow n t r e n ds – h a r de r t o bu y, e a sie r t o se ll! Taken all in all, t he MACD indicat or will t end t o neit her gain nor lose m uch when you are t rading against a prevailing m arket t r end, but w ill allow y ou t o lock in pr ofi t s w hen you are t rading in t he direct ion of a prevailing t r end. This qualit y allows invest ors t o t ake posit ions wit h a cert ain assurance t hat losses are likely t o be well cont ained even if price t rends are unfavorable, will be proper ly posit ioned as m arket t rends change. and t hat t hey Treasury Bonds, MACD, and a strong Uptrend 75.0 74.5 74.0 73.5 73.0 72.5 72.0 71.5 71.0 70.5 70.0 69.5 69.0 68.5 74.5 74.0 73.5 73.0 72.5 72.0 71.5 71.0 70.5 70.0 69.5 69.0 68.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 0.5 0.5 0.0 0.0 -0.5 -0.5 75.0 M odifyin g M ACD r u le s t o se cu r e t h e m ost fr om st r on g m a r k e t a dva n ce s – Ch a r t 9 Tr e a su r y Bon ds, M ACD a n d a St r on g Upt r e n d D u r in g fa vor a ble m a r k e t clim a t e s, if n o n e ga t ive dive r ge n ce s a r e pr e se n t , you m a y oft e n by pa ss t h e fi r st se ll sign a l t h a t de ve lops follow in g a m a r k e t r a lly. H ow e ve r , t h e se con d se ll sign a l D EFI N I TELY SH OULD be follow e d. I n t h e sit u a t ion illu st r a t e d, t h e r u le m odifi ca t ion se t ba ck t h e se ll sign a l fr om la t e Se pt e m be r t o la t e Oct obe r . We have alr eady seen one inst ance w here MACD pat t erns have produced prem at ure sell signals, when basic buy – sell rules are followed. Ther e is a sell rule m odifi cat ion t hat m ay be applied dur ing favorable m arket clim at es which will frequent ly provide super ior exit levels during st r ongly upt rended m arket periods while st ill cont aining risk levels. Here ar e t he condit ions required for a delayed sell signal t o be placed in effect . • • • • Th e st ock m a r k e t m u st be in a n u pt r e n d w h ich m a y be de fi n e d by a r isin g 5 0 - da y m ovin g a ve r a ge . slow M ACD com bin a t ion is e m ploye d for se llin g. A Ch e ck , a t t h e t im e t h a t t h e fi r st cr ossin g of t h e se ll M ACD lin e fr om a bove t o be low it s sign a l lin e t a k e s pla ce , w h e t he r t h e r e ha ve be e n a ny ne ga t ive dive r ge nce s, e it h e r in t h e M ACD t h a t is be ing u se d for bu yin g OR in t h e M ACD t h a t is be in g u se d for se llin g. I f t h e r e a r e n o dive r ge n ce s – M ACD line s a nd pr ice line s m oving in conj unct ion – AN D if t r e n ds of t h e m a r k e t a r e fa vor a ble , pr ice s a bove a r isin g 5 0 - da y m ovin g a ve r a ge , t h e n y ou ca n ign or e t h e FI RST se ll sign a l ge n e r a t e d by M ACD . You sh ou ld, h ow e ve r , t a k e a se con d se ll sign a l. You m a y u se , a s a ba ck - u p e x it st r a t e gy , a cr ossin g of t h e pr ice of you r in ve st m e n t fr om a bove t o be low t h e 5 0 - da y m ovin g a ve r a ge w h ich w ou ld pr oba bly t a k e pla ce AFTER t h e M ACD se ll sign a l t h a t you did n ot follow . Re vie w in g Ch a r t 9 – We will now review Char t 9 t o illust rat e t he condit ions under which a fi rst MACD sell signal m ay be by passed. St ar t ing on t he left of t he char t , July 1989, w e can see t hat MACD had recent ly generat ed a sell signal. Bond t rends w ere generally favorable at t he t im e, so a 6 – 19 day MACD com binat ion was used for buying, t he fam iliar 19- 39 day com binat ion for selling. M a r k e t e nt r y suppor t e d by posit ive dive r ge nce An init ial buy signal was act ually gener at ed in m id- July which abort ed in ear ly August – neit her buy nor sell not ed on t he chart . A second buy signal in m id- August w as well support ed, by a posit ive divergence in t he buying, 6 – 19 MACD, by a rising double bot t om in t he indicat or , and by a crossing of t he signal line. buy signal. The 19- 39 day MACD com binat ion short ly confi r m ed t he M ovin g a ve r a ge s, M ACD pa t t e r n s con fi r m a dva n ce - Bond prices advanced int o Sept em ber , t he 50- day m oving average t urning up, r e- confi rm ing t he generally bullish clim at e. Bot h t he 6 – 19 and t he 19 – 39 day MACD com binat ions r eached peak areas along wit h t he price of bonds, and bot h t urned down as t he pr ice decline got under way . A t u r n dow n of M ACD a lon g w it h pr ice s doe s N OT con st it u t e a n e ga t ive dive r ge n ce , w h ich t a k e s pla ce on ly w h e n n e w pr ice h igh s a r e u n con fi r m e d by M ACD . I n it ia l se ll sign a l n ot r e in for ce d by a n y n e ga t ive dive r ge n ce - The price t urndow n was suffi cient t o pr oduce an init ial sell signal in lat e Sept em ber when t he slow er MACD com binat ion, which had r isen above “ 0” ( Rem em ber t he st ipulat ion?) , cr ossed from above t o below it s signal line. H ow e ve r , in a sm u ch a s t h is w a s t h e fi r st se ll sign a l a ft e r t h e M ACD bu y, a n d in a sm u ch a s t h e t r e n d w a s u p a n d in a sm u ch a s t h e r e h a d be e n n o n e ga t ive dive r ge n ce s, t h is se ll sign a l m igh t w e ll h a ve be e n ign or e d. Se con da r y se ll sign a l con fi r m e d by n e ga t iv e dive r ge n ce - As m at t ers t ur ned out , t he bond m arket did rapidly recover, rising t o a new high dur ing Oct ober . t hat t im e? Yes, indeed. Was t he sit uat ion different at The new highs in Oct ober w ere n ot confi r m ed by MACD which did n ot m ak e a new high along wit h price – a clear cut negat iv e divergence. The second sell signal in Oct ober was, t herefor e follow ed ( as are all second sells) . As you can see, t he init ial delay in selling proved benefi cial. I n t his case, prices did rise t o new highs following t he sell signal t hat would hav e been followed, but in t he end t his did not result in any m issed profi t t o speak of. Use m ovin g a ve r a ge a s ba ck - u p st op sign a l - What if pr ices had not t urned up quickly following t hat init ial sell signal? Well, t he 50- day m oving av erage would have represent ed a court of last r esort . You could have sold on a penet rat ion of t hat average, as a back- up st op loss, revert ing t hen t o t he fast MACD as your re- ent ry t rigger. As you m ight surm ise, t his m odifi cat ion of sell rules draws upon t he concept t hat sell signals t hat t ake place in t he absence of negat iv e divergences t end t o be less serious t han sell signals t hat t ake place following negat ive divergences – hence, t he assum pt ion of som e risk while st ill m aint aining a st op- loss st r at egy as dam age cont rol. I n t he absence of any negat iv e divergence, and w it h t he m ark et in a general upt rend, short selling in t his sit uat ion would probably carry t oo high a lev el of risk t o be warrant ed ev en if t he 50- day m oving average had been v iolat ed. I n a sm u ch a s t h e 1 9 – 3 9 da y M ACD se llin g com bin a t ion did n ot r ise a bove “0 ”, n o se ll sign a l cou ld be ge n e r a t e d ba se d u pon t h a t M ACD lin e . Th e r e for e , w e m a k e u se of a se con da r y se ll r u le , t h a t is t r igge r e d w h e n t h e bu yin g M ACD com bin a t ion de clin e s, follow in g a bu y sign a l, t o a low t h a t is be low t h e low t h a t pr e ce de d t h e bu y. Th e se ll- st op is n ot ba se d u pon pr ice fa llin g t o be low a pr e v iou s low poin t . I t is ba se d u pon m om e n t u m r e a din gs ( M ACD ) fa llin g t o be low a pr e viou s low poin t . MACD is a st rong t im ing indicat or but is, of course, im perfect . There are t im es when MACD ent r ies w ill fail t o produce any follow t hrough in t he st ock and ot her m arket s. Chart 10 illust r at es an MACD st op t hat m ay be em ployed if a rise follow ing buy signals fails t o bring t he slower , selling, MACD t o above “ 0” , a pre- requisit e for m ore com m on sell signals. The buy signal in ear ly March was accom panied by basic cr it eria signifying a favorable m arket clim at e, a rising 50- day average at t he t im e j ust ifying t he use of t he very fast 6- 19 com binat ion as t he buy t rigger . not suffi cient ly so as t o bring t he slow er 19 – 39 day MACD com binat ion above “ 0” . Prices m ov ed up slowly follow ing t he ent ry, A downt ur n in pr ices as March m oved along brought pr ices below support levels ( oft en t aken as a st op- loss signal but one which w e do not use wit h MACD) . As t he decline cont inued, t he rapid 6- 19 MACD com binat ion fell t o below t he lows of lat e Febr uary – early March, indicat ing t hat downside m om ent um had incr eased t o new high levels for t he swing. Th is viola t ion of su ppor t in t h e M ACD in dica t or t h a t h a d be e n e m ploye d a s t h e bu y t r igge r , n ot t h e pr ice pa t t e r n , cr e a t e d t h e st op- loss se ll. MACD st op- loss signals and exit s ar e oft en follow ed by rat her rapid recov eries in MACD, new buy signals, usually t ak ing place at roughly t he sam e level as t he sell signal. This is t he case in t he exam ple show n. Ke y poin t ! - - M ACD st op- loss sign a ls a r e cr e a t e d by viola t ion s of su ppor t a r e a s in t h e M ACD in dica t or , n ot by viola t ion s of pr ice su ppor t . This m odifi cat ion of usual st op- loss st rat egies, oft en prev ent s t akes place when slower basing and bot t om form at ions develop. prem at ure selling t hat frequent ly SYN ERGY! M ACD CON FI RM ED BY OTH ER TECH N I CAL TOOLS…. Chart 11 illust r at es sit uat ions in which buy signals t ook place right in t he area at which downward sloping t rend lines were penet rat ed and sit uat ions in which MACD sell signals wer e confi r m ed by declines in MACD down and t hrough rising upt rend lines. The com binat ion of t rend line violat ion and MACD penet rat ion of signal lines is m ore powerful t han eit her elem ent alone. M ACD pa t t e r n s con fi r m e d by cyclica l st u die s – Ch a r t 1 2 Tim e Cycle s & M ACD Sign a ls N YSE 2 0 0 0 – 2 0 0 2 Le ge n d Un de r Ch a r t : Th e st ock m a r k e t follow e d a n in t e r m e dia t e cycle a ve r a gin g a ppr ox im a t e ly 1 1 0 da ys du r in g t h e pe r iod sh ow n. M ACD bu y signa ls w e r e n ice ly con fi r m e d by cyclica l pr oj e ct ion s, w h ich m a y be ba se d u pon m om e n t u m in dica t or s su ch a s M ACD r a t h e r t h a n pr ice . T- for m a t ion s m a t ch e d ve r y w e ll w it h M ACD se ll sign a ls du r in g t h e spr in g of 2 0 0 1 , w e r e pr e m a t u r e in t h e ir pr oj e ct ion s la t e r t h a t y e a r . Chart s 12 and 13 illust rat e t he use of cyclical proj ect ions as confi r m at ions of MACD buy and sell signals. As you can see, MACD buy signals were well confi rm ed by cyclical proj ect ions dur ing bot h per iods, 1989 and 2000 – 2002. The sell signal in May of 2001 fi t t he relevant T- form at ion ( Chart 12) alm ost exact ly but not t he exact workout of t he sell of March 2002, w hich developed a week aft er t he proj ect ion m ade by t he T- form at ion. Tim ing oscillat or s frequent ly refl ect m arket cycles very well, as w e can see on t hese char t s. Obse r va t ion s: M a r k e t cy cle s e x e r t t h e ir m ost a ppa r e nt in fl u e n ce du r in g pe r iods of n e u t r a l pr ice m ove m e n t . Ch a r t 1 3 is a n e x ce lle nt e x a m ple . I f a m a r k e t cycle t a k e s lon ge r t h a n nor m a l t o com ple t e , t h e n t h e n e x t cy cle w ill fr e qu e nt ly be sh or t e r , t h e a ve r a ge of t h e t w o defi n in g t h e ba sic cyclica l le n gt h of t h e cyclica l w a ve . Th is con ce pt is illu st r a t e d in Cha r t 1 2 , in w h ich w e ca n se e h ow t h e de ve lopm e nt of a longe r cycle be t w e e n Apr il – Se pt e m be r w a s follow e d by t h e de ve lopm e n t of a r e la t ive ly sh or t e r m a r k e t cyclica l w or k ou t . When MACD Does Not Provide Timely Signals 300 280 280 260 260 240 240 1.5 1.0 1.0 0.5 0.5 0.0 0.0 - 0.5 - 0.5 - 1.0 - 1.0 300 W h e n M ACD doe s N OT pr ovide t h e m ost t im e ly sign a ls – Ch a r t 1 4 N e w Yor k St ock Ex ch a n ge I n de x , 1 9 9 4 - 1 9 9 5 M ACD pr ovide d a fi n e m a r k e t e n t r y in D e ce m be r of 1 9 9 4 , ca r r ie d t hr ou gh w e ll in t o M a r ch of 1 9 9 5 , bu t t h e n , a lon g w it h m a n y ot h e r t e ch n ica l in dica t or s, pr odu ce d a pr e m a t u r e se ll sign a l, t h e a dva n ce con t in u in g t h e r e a ft e r w it h ou t pr ovidin g a for m a l oppor t u n it y for M ACD r e - e n t r y. Bu y sign a ls sh ow n a r e ba se d u pon t h e 1 9 – 3 9 da y M ACD com bin a t ion for pu r pose s of ch a r t cla r it y. N or m a lly, a som e w h a t m or e r a pid M ACD com bin a t ion w ou ld be e m ploye d for t h is pu r pose . MACD is a very powerful t im ing indicat or, but like any indicat or it does have it s Achilles heel, in t his case occasional diffi cult y in dealing w it h st eadily t rending, narrow channeled m arket advances or declines. Chart 14 illust r at es t he t ype of form at ion t hat produces problem s. MACD did a fi ne j ob of ent er ing t he st ock m arket as 1994 drew t o a close. The init ial sell signal at t he end of February 1995 m ight have been bypassed – t her e w ere no negat iv e divergences bet ween MACD and price m ovem ent , but a subsequent sell signals, part icularly t hose generat ed in June ( which were accom panied by a negat ive divergence) , would generally be follow ed. Som et im es, such pat t erns t ake place dur ing m arket declines. Pr ices decline st eadily, quiet ly and persist ent ly even as MACD r ises – t he st ock m arket very slow t o respond t o t he favorable im plicat ions of dim inishing downside m om ent um . I know of no ready way t o deal w it h such sit uat ions, if decisions are based upon MACD pat t erns alone. However, w e have already rev iew ed a num ber of t ools t hat m ight well have ident ifi ed st rengt h in t he st ock m arket t hat m ay count eract daily based MACD sell signals at cer t ain t im es. For exam ple, t he 10- day rat io of new highs t o t he sum of new highs and new lows m ay be t racking above t he 90% level, and/ or w eek ly rat ios of adv ances in relat ionship t o t he num ber of issues t raded on t he New York St ock Ex change m ay be producing it s ow n signals t o rem ain in t he st ock m arket . M on e y M a n a ge m e n t w it h M ACD ( a n d ot h e r in dica t or s) – The st ock m ar ket does advance approx im at ely 75% of t he t im e, short er t erm sell signals, part icular ly during bull m arket s, m or e oft en t han not j ust as well ignored as followed on average. This applies t o daily based MACD sell signals as well, which are oft en followed by r elat iv ely m inor m arket declines and by re- ent ry buy signals t hat t ake place m ore or less in t he area of previous sell signals. I n t his r egard, it is oft en bet t er m oney m anagem ent pract ice, t o develop m oney m anagem ent approaches t hat phase capit al int o and out of t he st ock m arket rat her t han t o at t em pt t o t ake m assiv e act ion on each and every buy or sell signal. Given t he general upside bias t o t he st ock m ark et , t here are r elat iv ely few periods each year during w hich you are likely t o want t o be fully out of t he st ock m ark et , par t icularly if your port folio includes a relat iv ely large port ion of low er volat ilit y m ut ual funds t hat are leading in relat ive st r engt h. An M ACD con fi gu r a t ion t h a t su gge st s m or e a ct ive se llin g – The above not wit hst anding, t here is one MACD confi gurat ion t hat carries clear ly bear ish im plicat ions, not on each and every signal, but based on ext ensiv e research int o t he hist ory of t he st ock m ark et , in t he aggregat e. Her e are t he param et ers. Th e “Fu ll Sca le M ACD Se ll Sign a l” - • • • • • • Th e 1 9 – 3 9 da y M ACD com bin a t ion is e m ploye d for t h e st a y ou t sign a l. Th e 1 9 – 3 9 da y M ACD com bin a t ion m u st be fa llin g. I f it t u r n s u p, t h e be a r ish im plica t ion s a r e ca n ce lle d. Th e 1 9 – 3 9 da y M ACD com bin a t ion m u st a lso be be low “0 ”. Alt h ou gh t h e m ost da n ge r ou s pe r iods for t h e st ock m a r k e t de ve lop w h e n t h e 1 9 – 3 9 da y M ACD com bin a t ion is st ill fa llin g a n d h a s de clin e d t o sligh t ly a bove “0 ”, you ca n , for pr a ct ica l pu r pose s, t a k e t h e “0 ” lin e a s t h e cr u cia l le ve l t h a t de fi n e s t h e com ple t ion of t h e m ost r e lia ble M ACD se ll sign a ls. N ot e ve r y de clin e , e ve n give n t h e a bove con dit ion s, w ill gr a du a t e in t o se r iou s m a r k e t da m a ge , bu t on a ve r a ge t h e se ll sign a ls de scr ibe d a bove a r e follow e d by fu r t h e r m a r k e t de clin e , a n d sh ou ld be r e spe ct e d. Tot a l t im in g r e su lt s a r e lik e ly pr ove sligh t ly m or e e ffi cie nt if a ll M ACD se ll signa ls a r e follow e d w h e n t h e y occu r , r a t h e r t h a n w a it in g for t h e 1 9 – 3 9 u n it M ACD t o de clin e t o be low “0 ”, bu t a t t h e cost of m or e fr e qu e n t t r a din g, w it h it s a t t e n da n t e x pe n se s, a n d gr e a t e r n u m be r s of w h ipsa w s. On e r e com m e n de d m on e y m a n a ge m e n t st r a t e gy in volve s ligh t e n in g u p m or e r a pidly w it h som e lon g posit ion s on in it ia l se ll sign a ls bu t t o m a in t a in a t lea st som e h oldin gs u n t il “Fu ll Sca le M ACD se ll sign a ls” t a k e pla ce . M ACD TH ROUGH TH E YEARS – LON G TERM , SH ORT TERM , AN D I N TRA- D AY We have pret t y well covered t he basic oper at ing principles of MACD, and have discussed som e way s t hat MACD pat t erns m ay be int egrat ed w it h ot her t echnical t ools and approaches. I n t his por t ion of our discussion of MACD, we w ill review t he perform ance of MACD over decades of st ock m arket hist ory, em ploying weekly and m ont hly MACD pat t erns as well as daily, and even int ra- day pat t erns. This is t ruly an indicat or t hat m ay be applied t o virt ually all t im e fram es. Th is is a w e e k ly ch a r t of t h e N YSE I n de x , 1 9 8 2 – 1 9 8 4 . Fa m ilia r pa r a m e t e r s a r e e m ploy e d, t r a n sla t e d fr om da ily t o w e e k ly da t a – a 5 0 - u n it m ovin g a ve r a ge , a 6 – 1 9 M ACD com bin a t ion for bu y in g, a slow e r 1 9 – 3 9 M ACD com bin a t ion for se llin g. ( A 1 2 – 2 6 M ACD com bin a t ion m igh t w e ll h a ve be e n e m ploy e d a t diffe r e n t t im e s du r in g t h is pe r iod a s t h e bu y t r igge r .) Following an abort ed, but st ill profi t able, buy signal dur ing t he spring of 1982, a weekly MACD based buy signal was generat ed in July of 1982. Prices fell t o below t he purchase level in August , MACD falling right t o it s previous low s at t he t im e ( w hich could hav e been t aken as a sell signal) but repeat buy ent r ies rapidly developed. From August 1982 on, MACD perform ed fl aw lessly, bot h short er t erm and longer t er m MACD com binat ions rapidly rising t hrough t he “ 0” level. Negat iv e divergences and crosses from above t o below t he signal line t hat t ook place in t he short t erm , 6 – 19 week MACD com binat ion, did not pr oduce sell signals inasm uch as t he slower m oving, longer t erm , MACD line advanced sm oot hly , unt il it s generat ion of a sell signal in July of 1983, fi nally signaling an end t o a m arket advance t hat had last ed for nearly a full year! This is an excellent ex am ple of t he benefi t s of using short er t er m MACD com binat ions for buy signals and longer t er m MACD com binat ions for sell signals. An e x a m ple of t h e M ACD st op – loss sign a l in a ct ion – The pat t er ns of MACD and t he price m ov em ent of t he st ock m arket during 1984 are inst ruct ive. Following t he buy signal of March 1984, st ock prices dr ift ed downwards unt il t he st ar t of August , m ov ing t o new low s as t he spring and sum m er m oved along. However, MACD levels did NOT m ake a new low in t he int erim , t herefor e forest alling a st op- loss sell signal, t he holding of posit ions ult im at ely w ell vindicat ed by t he lat e sum m er m arket rally . M ACD e m ploye d for da y t r a din g pu r pose s Ch a r t 1 6 3 0 - M in u t e M ACD Pa t t e r n s a n d D a y Tr a din g S & P 5 0 0 M a r ch 2 0 0 2 Fu t u r e s Con t r a ct Th is ch a r t is a 3 0 - m in u t e ba r ch a r t of t h e S & P 5 0 0 fu t u r e s con t r a ct , a lon g w it h a 1 9 – 3 9 u n it M ACD com bin a t ion , in t h is illu st r a t ion e m ploye d for bot h bu yin g a n d se llin g. N ot ice t h e u se of T- for m a t ion s t o con fi r m M ACD sign a ls. I t is quit e a j um p from long t erm weekly based chart s t o 30- m inut e chart s em ployed for day t rading purposes but , as you can see, MACD pat t erns rem ain very m uch t he sam e, as do T- form at ions, which really com e int o t heir own during neut ral m arket periods. There ar e a num ber of angle change form at ions on t his chart which have not been m arked off. can ident ify som e of t hem . Perhaps you m ay want t o see if you There w ere t w o very fi ne posit ive divergences, w hich hav e been m arked, t hat provided excellent confi r m at ions of favorable ent ry point s. I nt ra- day price ranges ar e oft en fairly narrow so it is m or e im port ant in day t rading t han in posit ion t rading t o est ablish posit ions as early as possible. M ACD AN D M AJOR M ARKET TREN D S – Ch a r t 1 7 M ACD a n d M a j or Te r m Sign a ls N e w Yor k St ock Ex ch a n ge Com posit e , 1 9 6 9 – 1 9 8 0 M on t h ly ba se d M ACD pa t t e r n s h a ve h a d a fi n e , if im pe r fe ct , h ist or y of confi r m in g r e ve r sa ls in m a j or m a r k e t t r e n ds, a s a ge n e r a l r u le ge n e r a t in g bu y a n d se ll sign a ls a ppr ox im a t e ly t h r e e m on t h s follow in g a ct u a l m a j or t e r m pe a k s a n d low s in t h e st ock m a r k e t . ( D u r in g som e of t h e pe r iod sh ow n , t h e 1 2 – 2 6 m on t h M ACD com bin a t ion w ou ld h a ve be e n m or e u su a lly e m ploye d a s t h e bu y t r igge r t h a n t h e 6 – 1 9 m on t h com bin a t ion illu st r a t e d.) M on t h ly ba se d, m a j or t e r m pr ice a n d M ACD ch a r t s ge n e r a lly r e fl e ct t h e use fu lne ss of e m ploying shor t e r t e r m M ACD com bin a t ion s for bu y in g pu r pose s a n d lon ge r t e r m M ACD com bin a t ion s for se llin g pu r pose s. Th e 1 9 – 3 9 da y M ACD com bin a t ion did cr oss fr om a bove t o be low it s sign a l lin e la t e in 1 9 8 6 , bu t in t h e a bse n ce of a n y n e ga t ive dive r ge n ce s in e it h e r t h e sh or t e r t e r m 6 – 1 9 da y M ACD pa t t er n or t h e lon ge r t e r m 1 9 – 3 9 da y pa t t e r n , t h e fi r st pe n e t r a t ion m igh t h a ve be e n by pa sse d a s a se ll sign a l. I t w a s a ct u a lly t ou ch a n d go a s t o w h e t h e r m on t h ly M ACD w a s a ble t o a void t h e 1 9 8 7 cr a sh , t h ou gh w e e k ly M ACD pa t t e r n s did, in de e d, cle a r ly do so. Mont hly MACD pat t erns r efl ect ed t he secular change t hat developed in t he st ock m arket bet ween t he lat e 1960’s int o t he 1970’s and t hen int o t he 1980’s. The st ock m arket was essent ially neut ral in it s m aj or t rend t hroughout t he 1970’s, ending t he decade pr et t y m uch where t he 1968 bull m arket cam e t o an end. Peaks in MACD pat t er ns act ually declined as t he decade m oved along, t he nadir for MACD t ak ing place lat e in 1974 along wit h t he low s of t he st ock m arket . The st ock m ar ket clear ly st rengt hened as t he 1970’s cam e t o an end, int o t he 1980’s and ult im at ely t he 1990’s, t he increasing st rengt h refl ect ed in t he abilit y of even t he short est t er m a nearly six year period. m ont hly MACD’s t o rem ain above t he “ 0” lev el bet ween 1982 – 1987, I n fact , a cer t ain libert y has been t aken in t he assum pt ion of a 1984 buy signal inasm uch as t he 6 – 19 m ont h MACD com binat ion never did decline t o below t he “ 0” level, gener ally a requir ed pre- condit ion t o buy signals. There ar e t im es t hat st ock m arket indicat or s, including t he general pr inciples involv ed in using MACD, produce confl ict ing signals and when decisions have t o be m ade based upon t he w hat appears t o be t he w eight of evidence. I n t his case, t he rising double bot t om in MACD, coupled wit h a cross of t he MACD line above it s signal line and j ust a narrow m iss of reaching t he “ 0” line, all w it hin t he cont ext of a rising 50- m ont h m oving average, would seem t o have suggest ed suffi cient j ust ifi cat ion Weekly based MACD pat t erns, as well as m ont hly MACD pat t er ns, provide m eaningful inform at ion regar ding longer t er m st ock m arket t rends. I t is oft en benefi cial t o t rack a num ber of t im e fram es sim ult aneously . short er and longer t erm MACDs coalesce oft en carry part icular signifi cance. Periods at which low s and highs of TH E AM AZI N G ABI LI TY OF M ACD TO I D EN TI FY SI GN I FI CAN T M ARKET LOW POI N TS FOLLOW I N G SEVERE STOCK M ARKET D ECLI N ES Ch a r t 1 9 N e w Yor k St ock Ex ch a n ge I n de x Th e Fe br u a r y – M a r ch 1 9 8 0 St ock M a r k e t D e clin e Aft e r pr odu cin g a se ll sign a l on ly t h r e e da ys follow in g t h e sign ifi ca n t m a r k e t h igh in Fe br u a r y of 1 9 8 0 , M ACD r e m a in e d out of t h e st ock m a r k e t t h r oughout t h e de clin e , r e - e nt e r ing on ly t h r e e da ys a ft e r t h e fi n a l low s h a d be e n e st a blish e d a s M a r ch ca m e t o a close . MACD would be wort h following even if only one of it s abilit ies ex ist ed – it s abilit y t o defi ne m arket re- ent ry j unct ures follow ing serious int er m ediat e and long t erm m arket declines. We have alr eady seen t his abilit y as it r elat es t o longer t er m m arket t r ends in t he abilit y of m ont hly based MACD chart s t o ident ify m aj or bear m arket lows. Char t 19 illust rat es t he abilit y of MACD t o ident – wit h ifyconsider able reliabilit y – t he conclusions of int er m ediat e st ock m ark et declines. I , m yself, know of no indicat or t hat surpasses MACD in t his r egar d. The st ock m ar ket decline t hat t ook place during t he lat e wint er of 1980 is a fi ne exam ple. St rong enough during m ost of 1979, t he st ock m arket encount er ed a second successive “ Oct ober cr ash” ( act ually not severe enough t o qualify as a crash) . The decline, followed by a period of base building was rev ersed by a st rong advance int o February of 1980. I n m id- February of t hat year, high int erest rat es and rat es of infl at ion, coupled wit h high levels of speculat ion in t he pr ecious m et als sect or, result ed in a severe st ock m arket decline which t ook t he norm ally placid New York St ock Exchange I ndex down by approxim at ely 20 percent in j ust six w eeks. And how well did MACD cope wit h t hese m ar ket gyrat ions? Act ually, rat her well. The sell signal did not occur at t he very highs of t he st ock m ark et in m id- Febr uary but did t ake place only t hree day s following t he ult im at e peak . of t he st ock m arket unt il lat e March. days aft er t he fi nal m arket bot t om . MACD, t hereaft er, rem ained out MACD lines t urned upwards on t he fi rst day of t he recov ery, cr ossed t he signal line only t hr ee I t goes wit hout saying t hat not ev ery m arket cycle is so well t rack ed. be observed t hat t he success of MACD dur ing t his February cycle was not unusual. That said, it should also Le ge n d: A lon ge r t e r m w e e k ly M ACD t u r n e d u p j u st on e w e e k follow in g t h e fi n a l low s of a ve r y se r iou s m a r k e t 1 9 9 8 m a r k e t de clin e , t h ough t h e 1 9 – 3 9 w e e k M ACD did not cr oss it s signa l lin e un t il fi ve w e e k s fr om t h ose low s. A se ll sign a l in M a y of 1 9 9 8 w a s som e w h a t pr e m a t u r e bu t t h e se ll sign a l in Ju n e of 1 9 9 9 did pr ove w e ll t im e d. Chart 20 illust r at es t he applicat ion of MACD, t his t im e weekly based, t o anot her int er m ediat e m ark et cycle. The chart show s a longer t er m , 19 – 39 week MACD com binat ion, nor m ally used for selling. The use of t he 12 – 26 week MACD for buy ing inst ead of t he – 39 would have produced a m arket re- ent ry one week sooner t han t he ent ry shown. 19 Aft er a som ew hat prem at ure sell signal in May of 1998, t he 19 – 39 week MACD rem ained out of t he st ock m arket t hrough t he fi nal leg of t he m arket advance, t hrough t he ver y severe sum m er decline of 1998, fi nally pr oducing a buy signal in Novem ber , fi ve weeks from t he lows of t he m arket decline. ( Daily based MACD pat t erns produced, during t his per iod, one unusually poor and ult im at ely st opped out buy signal in August of 1998, and subsequent ly, excellent repeat buy signals in Sept em ber and Oct ober , bot h j ust days follow ing low point s of a fi nal double bot t om form at ion which can be seen on t he w eek ly chart as well.) Weekly MACD pat t er ns would have kept invest or s in t he st ock m arket for seven m ont hs, capt uring t he best par t of t he m arket advance. A su cce ssfu l se qu e n ce of M ACD bu y a n d se ll sign a ls t ook pla ce du r in g 1 9 9 0 a n d e a r ly 1 9 9 1 . Th is is a de t a ile d ch a r t w h ich illu st r a t e s m a n y con ce pt s r e la t in g t o M ACD , in clu din g posit ive a n d n e ga t ive dive r ge n ce s, r isin g bot t om for m a t ion s, w e dge s a n d T- for m a t ion s. Re a de r s m igh t w a n t t o m a k e copie s of t h is ch a r t a n d dr a w in ch a r t for m a t ion s t h a t h a ve n ot be e n m a r k e d. The 1990 – 1991 period present ed m any opport unit ies for act ive m arket t rading. As a fi nal r eview of t he operat ing principles of MACD, we w ill exam ine t he price m ovem ent and MACD pat t erns of t he period. I n it ia l r a lly a t st a r t of y e a r - The st ock m ar ket declined during January of 1990, an excellent 12 – 26 day MACD buy signal dev eloping in ear ly February. MACD pat t erns st ar t ed st rongly wit h t he advance, r ising bot t om s developing in bot h short er and longer t er m MACD lines, but bet ween March and April, negat ive div ergences developed in t he 12 – 26 day MACD pat t er n, war ning of incipient m arket w eakness. Because negat ive divergences were in place, t he sell signal produced in April by t he longer t erm 19 – 39 day com binat ion would be followed. Br ie f de clin e a n d w e ll- t im e d m a r k e t r e - e n t r y – The sell signal was, indeed, follow ed by a relat iv ely short t erm t hough ver y t radeable m arket decline, suffi cient t o draw t he 12 – 26 day buying MACD line t o below “ 0” , est ablishing a pr erequisit e for a new buy signal w hich t ook place early in May. Ra lly a n d t oppin g for m a t ion Prices advanced sharply im m ediat ely follow ing t he ear ly May ent ry, but by t he end of May, slackening m om ent um creat ed negat ive divergences in t he 12 – 26 day MACD, est ablishing t he perquisit es for t he sell signal t hat developed in early June. There was a quick MACD re- ent ry in m id- June ( not show n on t he chart ) and a secondary sell signal ( not m ark ed) in m id- July , by which t im e m ore serious negat iv e divergences ( m ark ed on t he char t ) had developed. The t im e span bet w een t he t ops in early June and m id- July , approxim at ely seven w eek s, over which upside m om ent um clear ly dim inished, is usually signifi cant if negat iv e divergences t ake place over t he per iod. MACD peak s for bot h short er and longer t er m MACD pat t erns were clear ly lower at t he highs of July t han of June, t hough prices did m ake new highs in July . m id- July MACD sell signal proved t o be ex t r em ely well t im ed. I n any event , t he W a t e r fa ll de clin e , a n d t h e n bot t om in g pr oce ss – The st ock m ar ket broke dow n sharply following t he July sell signals. MACD did reach it s low s in lat e August , producing init ially a prem at ure buy signal which was not st opped out t hough prices declined during Sept em ber t o new low s, because MACD failed t o confi r m t hose new price lows. Subsequent m arket act ion pr oduced increasingly favorable pat t erns in bot h price m ovem ent and t he developm ent of favorable MACD confi gurat ions. Prices t raced out , bet w een Sept em ber and Oct ober , a declining w edge form at ion wit h it s bullish im plicat ions. if you can draw t he lines.) ( See At t he sam e t im e, MACD, bot h short and long t erm , t raced out a series of higher low s, posit ive divergences developing bet ween low er low s in price, higher lows in MACD. The m arket r ecovery ult im at ely t ook hold, pr ices m oving up and out of t he base form at ion. Fin a l sh a k e ou t a n d r e cove r y – An MACD sell signal did t ake place in Decem ber as t he 12 – 26 day MACD com binat ion produced negat iv e divergences, and t he slow er 19 – 39 day MACD crossed from above t o below it s signal line. A successful scalp was possible bet w een t his sell signal and a fresh buy signal in Januar y of 1991, t he fast er 12 – 26 MACD fi rst falling below “ 0” , achiev ing t his precondit ion, t urning up and crossing it s signal line t hereaft er. Taken all in all, MACD produced very accurat e signals t hroughout t he 1990 – 1991 period, wit h t he ex cept ion, per haps, of t hat ear ly buy signal in August which, w hen all was said and done, did ult im at ely pr ove profi t able. M ACD AN D TH E FOUR STAGES OF TH E M ARKET CYCLE Th e sm oot h pa t t e r n s of M ACD fr e qu e n t ly pr ovide cle a r in dica t ions of t h e four st a ge s of t h e m a r k e t cycle . As a fi nal not e regarding MACD, w e m ight observe t hat it s pat t erns, which are relat iv ely sm oot h com pared t o m ost m arket indicat ors, do provide suggest ions as t o t he four st ages of m arket cy cles. As we know , t he accum ulat ion of long posit ions t ak es place during St age 1, generally w it hin t he lat t er half, or at t he onset of St age 2. Posit ions ar e held t hroughout St age 2 int o St age 3, dur ing which st age long side holdings are reduced in ant icipat ion of t he declines t hat are refl ect ed in St age 4. This is a daily chart t hat refl ect s a r elat iv ely short t erm m arket cycle. Weekly and m ont hly based chart s will refl ect t he st ages of m ore signifi cant m arket cy cles. REV I EW I N G RULES AN D PROCED URES ASSOCI ATED W I TH TH E M ACD I N D I CATOR A lot of ground has been cov ered in t his sect ion, so we w ill conclude wit h a sum m ary of t he rules and procedur es t hat m ay be associat ed w it h t he m ov ing average conv er gence – divergence indicat or . CREATI N G AN D M AI N TAI N I N G YOUR M ACD I N D I CATOR: Ca lcu la t e a n d m a in t a in se t s of t h r e e M ACD com bin a t ion s – on e da ily ba se d se t for sh or t e r t e r m t r a din g, on e w e e k ly ba se d se t for lon ge r t e r m t r e n ds a n d, if you w a n t , on e m on t h ly ba se d se t t o r e fl e ct m a j or lon g t e r m t r e n ds. Th e M ACD in dica t or m a y be follow e d for da y t r a din g a s w e ll, in w h ich ca se 5 - m in u t e , 3 0 - m in u t e a n d 6 0 - m in u t e se t s a r e lik e ly t o pr ove ve r y u se fu l. Ea ch se t sh ou ld e m ploy a sh or t , a m e diu m a n d a lon ge r t e r m M ACD com bin a t ion . Th e se m igh t in clu de , for e x a m ple , a 6 – 1 9 u n it M ACD for r a pid bu y sign a ls du r in g m or e fa v or a ble m a r k e t clim a t e s, a 1 2 – 2 6 u n it M ACD for bu y sign a ls du r in g n e u t r a l m a r k e t pe r iods a n d for se ll sign a ls du r in g ve r y w e a k m a r k e t pe r iods, a n d a 1 9 – 3 9 u n it M ACD com bin a t ion for se ll sign a ls. Sign a l lin e s w ill u su a lly be 6 – 9 u n it e x pon e n t ia l m ovin g a ve r a ge s of t h e M ACD lin e s. Sh or t e r t e r m sign a l lin e s w ill oft e n pr odu ce m or e t im e ly sign a ls bu t w ill a lso be m or e pr on e t o fa lse signa ls a n d w h ipsa w s. I n a ddit ion t o M ACD , t h e m a in t e n a n ce of a n a ppr opr ia t e t r e n d de fi n in g m ovin g a ve r a ge is r e com m e n de d. Th e 5 0 - u n it m ovin g a ve r a ge t e n ds t o w or k w e ll in t h is r e ga r d. BUY SI GN ALS: Fir st , t e st for t r e n d w it h t h e 5 0 - u n it m ovin g a ve r a ge . Se con d, t e st for posit ive dive r ge n ce s in you r BUY M ACD in dica t or s. Th ir d, t e st for m a r k e t cycle s, T- for m a t ion s, bu llish w e dge s, a n gle ch a n ge pr oj e ct ion s a n d pot e n t ia l viola t ion s of dow n t r e n ds in M ACD . I f m a r k e t t r e n ds ( m e a su r e d by t h e dir e ct ion of t h e 5 0 - u n it m ovin g a ve r a ge ) a r e a t le a st n e u t r a l, a n d/ or if posit ive dive r ge nce s a r e in pla ce , a nd/ or if t he r e a r e fa vor a ble cy cle s or ch a r t pa t t e r n s pr e se n t , t h e n you m igh t u se t h e r a pid 6 – 1 9 M ACD com bin a t ion for e n t r y. As a ge n e r a l r u le , t h e m e diu m 1 2 – 2 6 da y com bin a t ion is som e w h a t le ss lik e ly t o cr e a t e w h ipsa w s. I f m a r k e t t r e n ds a r e n e ga t ive , t h e m e diu m M ACD is ge n e r a lly u se d for bu yin g. PREREQUI SI TE: Un le ss lon ge r t e r m m a r k e t t r e n ds a r e ve r y fa vor a ble , or a cle a r posit ive dive r ge n ce is in pla ce , or a sign ifi ca n t dow n t r e n d h a s be e n viola t e d, n o bu y sign a l ca n t a k e pla ce u n t il t h e M ACD com bin a t ion e m ploye d for bu y in g h a s fi r st fa lle n t o be low “0 ” sin ce t h e la st se ll sign a l. Th e w a ive r of t h e “0 ” pe n e t r a t ion r e qu ir e m e nt t a k e s pla ce in fr e qu e nt ly. SELL SI GN ALS: I f t h e r e a r e n e ga t ive dive r ge nce s in M ACD , e ve n if long t e r m t r e n ds a r e n e u t r a l t o bu llish , se ll on sign a ls ge n e r a t e d by t h e 1 9 – 3 9 u n it M ACD com bin a t ion . Se ll in dica t ion s t a k e pla ce w h e n M ACD t u r n s dow n in a n a r e a a bove “0 ” a n d a r e con fi r m e d w h e n t h e M ACD lin e cr osse s fr om a bove t o be low t h e sign a l lin e . I f t h e r e a r e N O n e ga t ive dive r ge n ce s in e it h e r t h e m e diu m or slow M ACD com bin a t ion s, you m a y bypa ss t h e fi r st se ll sign a l t h a t t a k e s pla ce . I f you do bypa ss, t h e n u se t h e 5 0 - u n it m ovin g a ve r a ge a s you r st op, se llin g if t h a t a ve r a ge is pe n e t r a t e d t o t h e dow n side . Se ll st ops a lso t a k e pla ce if, follow in g a pu r ch a se , t h e bu yin g M ACD le ve l fa lls t o be low it s pr e viou s low poin t e ve n if t h e a r e a a bove “0 ” h a s n ot be e n r e a ch e d. Alw a ys t a k e t h e se con d se ll sign a l ge n e r a t e d by t h e 1 9 – 3 9 u n it M ACD com bin a t ion . I f lon ge r t e r m t r e n ds a r e cle a r ly n e ga t ive , you m a y e m ploy t h e 1 2 – 2 6 u n it M ACD for se llin g a s w e ll a s for bu yin g, se llin g on a t u r n dow n a n d cr oss fr om a bove t o be low it s sign a l lin e , in t h e a r e a a bove “0 ”. Th e m or e con fi r m a t ion s you se cu r e of t h e t im e lin e ss of you r M ACD posit ion s, t h e la r ge r t h e a m ou n t of posit ion s you sh ou ld t a k e . Re m e m be r t h e con ce pt of syn e r gy. Oh , ye s, j u st in ca se you t h ou gh t I for got …… CON VERTI N G TH E D AI LY BREAD TH TH RUST M OD EL I N TO AN I N TERM ED I ATE EN TRY…. I prom ised at t he end of Chapt er 6 t o show you how t o em ploy MACD t o convert t he short er t er m daily based Br eadt h Thrust t im ing m odel int o a m ore int er m ediat e ver sion, capable of rem aining in t he st ock m arket for longer periods of t im e. incident ally, em ploy t his m et hod t o ext end t he liv es of ot her short er t erm t im ing m odels t hat you em ploy. You m ight , Ther e is a very good chance t hat you will fi nd your self ext ending profi t while reducing t rades w it h t heir at t endant whipsaws and t ransact ion cost s. The rule changes are act ually rat her st raight forward. Here are t he r ules for t he int erm ediat e version of “ Breadt h Thr ust ” . Bu y sign a ls: As be for e , y ou bu y w h e n t h e 1 0 - da y e x pon e n t ia l a ve r a ge of t h e r a t io, a dva n cin g issu e s/ a dva n cin g + de clin in g issu e s, r ise s t o 6 1 .5 % or h igh e r . Th e r e a r e n o ot h e r bu y e n t r ie s. Se ll sign a ls: As be for e , y ou se ll w h e n t h e 1 0 - da y e x pon e n t ia l a ve r a ge of a dva n cin g issu e s/ a dva n cin g + de clin in g issu e s fa lls t o 4 9 .0 % or low e r PROVI D I N G TH AT – Th e 1 9 – 3 9 da y M ACD of pr ice s on t h e N e w Yor k St ock Ex cha n ge doe s n ot lie a bove 1 % . BOTH CON D I TI ON S M UST EX I ST SI M ULTAN EOUSLY – Br e a dt h Th r u st le ve ls a t 4 9 .0 % or be low , M ACD be low + 1 .0 % . Ot h e r w ise , n o se ll sign a l t a k e s pla ce . Th e 1 % le ve l is ca lcu la t e d by su bt r a ct in g t h e slow e r 3 9 - da y e x pon e n t ia l a ve r a ge of da ily closin g pr ice s of t h e N e w Yor k St ock Ex ch a n ge I n de x fr om t h e fa st e r 1 9 - da y e x pon e n t ia l a ve r a ge of da ily closin g pr ice s a n d t h e n dividin g t h e r e sult by t h e le ve l of t h e fa st e r 1 9 - da y e x pon e nt ia l a ve r a ge . For e x a m ple , if t h e 1 9 - da y e x pone nt ia l a ve r a ge of t h e N e w Yor k St ock Ex ch a n ge I n de x st ood a t 6 5 0 0 a n d t h e 3 9 - da y e x pon e n t ia l a ve r a ge of t h e N e w Yor k St ock Ex ch a n ge I n de x st ood a t 6 4 0 0 – You w ou ld su bt r a ct 6 4 0 0 fr om 6 5 0 0 ( 6 5 0 0 m in u s 6 4 0 0 ) . Th e r e su lt , + 1 0 0 . You w ou ld t h e n divide 1 0 0 by 6 4 0 0 , 1 0 0 / 6 4 0 0 . Th e r e su lt , + .0 1 5 6 . M u lt iply by 1 0 0 t o con ve r t t h is in t o a pe r ce n t a ge , + 1 .5 6 % . I n a sm u ch a s M ACD lie s a bove 1 .0 % , n o se ll w ou ld t a k e pla ce a t t h is t im e . You w ou ld se ll on ly a ft e r M ACD h a s fa lle n be low 1 .0 % PROVI D I N G t h a t Br e a dt h Th r u st r e a din gs st a n d a t or be low 4 9 .0 % a t t h a t t im e . ON CE AGAI N , BOTH CON D I TI ON S M UST EXI ST SI M ULTAN EOUSLY. Ta ble 1 TH E M ACD FI LTERED VERSI ON OF BREAD TH – TH RUST N e w Yor k St ock Ex ch a n ge I n de x , 1 9 7 0 – 2 0 0 4 ( Th e m e t h od of ca lcu la t in g le ve ls of t h e N YSE I n de x w a s ch a n ge d a s of D e ce m be r 3 1 , 2 0 0 2 . D a t a pr ior t o t h a t da t e h a s be e n r e sca le d t o con for m t o cu r r e n t pr icin g pr oce du r e s.) Bu y D a t e Pr ice Se ll D a t e Pr ice Ga in / Loss 1 2 / 2 9 / 7 0 5 3 0 0 5 / 1 8 / 7 1 5 8 7 + 1 0 .7 % 1 2 / 0 3 / 7 1 5 6 5 0 4 / 2 8 / 7 2 6 3 4 + 1 2 .2 0 9 / 2 1 / 7 3 6 1 0 1 1 / 0 6 / 7 3 5 9 5 - 2 .5 0 1 / 0 3 / 7 4 5 6 2 0 1 / 1 0 / 7 4 5 2 3 - 6 .9 1 0 / 1 0 / 7 4 3 8 8 1 0 / 2 4 / 7 4 3 9 2 + 1 .0 0 1 / 0 3 / 7 5 3 9 4 0 7 / 2 8 / 7 5 5 0 2 + 2 7 .4 0 1 / 0 2 / 7 6 5 0 7 0 4 / 1 4 / 7 6 5 6 4 + 1 1 .2 1 2 / 0 9 / 7 6 5 9 4 0 1 / 2 7 / 7 7 5 8 6 - 1 .3 1 1 / 1 0 / 7 7 5 4 9 1 2 / 0 6 / 7 7 5 4 2 - 1 .3 0 4 / 1 7 / 7 8 5 5 7 0 6 / 2 7 / 7 8 5 6 4 + 1 .3 0 8 / 0 2 / 7 8 6 1 1 0 9 / 2 6 / 7 8 6 1 1 0 0 1 / 0 5 / 7 9 5 8 5 0 2 / 0 8 / 7 9 5 7 8 - 1 .2 0 8 / 2 0 / 8 2 6 8 3 0 7 / 1 9 / 8 3 1 0 0 9 + 4 7 .7 0 8 / 0 2 / 8 4 9 3 6 1 0 / 0 9 / 8 4 9 8 9 + 5 .7 0 1 / 1 4 / 8 5 1 0 4 0 0 3 / 2 5 / 8 5 1 0 8 9 + 4 .7 0 5 / 2 0 / 8 5 1 1 6 0 0 8 / 0 5 / 8 5 1 1 6 5 + 0 .4 1 1 / 1 1 / 8 5 1 2 0 3 0 5 / 1 9 / 8 6 1 4 2 3 + 1 8 .3 0 1 / 1 2 / 8 7 1 5 7 8 0 4 / 2 0 / 8 7 1 7 1 4 + 8 .6 0 1 / 3 0 / 9 1 1 9 6 6 0 5 / 1 5 / 9 1 2 1 3 6 + 8 .6 1 2 / 2 7 / 9 1 2 3 6 5 0 3 / 0 4 / 9 2 2 3 9 6 + 1 .3 0 5 / 0 5 / 9 7 4 5 6 1 1 0 / 2 7 / 9 7 4 8 9 7 + 7 .4 0 5 / 3 0 / 0 3 5 4 3 5 0 8 / 0 4 / 0 3 5 5 1 6 + 1 .5 1 2 / 3 0 / 0 3 6 4 4 4 0 3 / 1 5 / 0 4 6 4 4 5 + 0 .0 0 5 / 2 5 / 0 4 6 4 2 9 0 6 / 1 4 / 0 4 6 4 6 5 + 0 .6 Su m m a r y of Re su lt s: 1 8 of 2 4 ( 7 5 % ) of t r a de s w e r e pr ofi t a ble , w it h on e br e a k e ve n . Pr ofi t a ble t r a de s pr odu ce d a ve r a ge ga in s of 9 .4 % , losin g t r a de s a n a ve r a ge loss of – 2 .6 % . Tot a l pe r ce n t a ge pr ofi t s w e r e 1 2 .7 6 t im e s t h e t ot a l pe r ce n t a ge losse s. Th e m ode l, in ve st e d on ly 1 8 .3 % of t h e t im e , pr odu ce d a n n u a l r e t ur n s of + 4 .2 3 % or m or e t h a n h a lf t h e t ot a l ga in r e cor de d t h r ou gh 1 0 0 % in ve st m e n t in t h e N e w Yor k St ock Ex ch a n ge ove r t h is pe r iod. D ivide n d pa y m e n t s a n d in t e r e st w h ile in ca sh a r e n ot in clu de d. M ACD Filt e r e d Br e a dt h Th r u st Applie d t o t h e N a sda q Com posit e I n de x – The Nasdaq Com posit e began it s exist ence on Febr uary 5, 1971. The sum m ary below is based on dat a from May 1971, t he fi r st buy signal t aking place on Decem ber 3, of t hat year . Apart from t he init ial t rade, t he m odel, applied t o t he Nasdaq Com posit e t hough based on NYSE I ndex dat a, would have had t he sam e dat es as in Table 1.