Ok I am back for another post on MACD

I hope what I said about MACD makes sense.... not bad in short term interval (intra-day charts) but less useful in long term charts (daily)...this is true when using traditional methods of evaluation this indicator.

I should stop here for a second and discuss indicator selection.

Are all indicators good? I will give a limited yes if they have been around for a while. I have not evaluated every one I have seen...I don't really have a reason to look further as I have my suite of indicators and spent many years evaluating their use. Some indicators are too wild for me, they fluctuate madly and I don't find them predictable or relating to price.

Should you use/learn every indicator that you find. Even the decent understandable ones have a problem. If two indicators give a very similar look at a chart .... don't pick both indicators...You are not making your analysis better. You are getting false reinforcement.

MACD and TRIX are a good example of this as can be shown in this chart...





As you can see, the two indicators track each other pretty closely, even though they have a very different calculation. TRIX is a bit smoother but I like MACD as it more closely follows the dips and rises of price.

Always choose an indicator for a reason, how it enhances your ability to interpret the chart. I have seen many beautiful ....basically useless charts in my time....this is not an art class.


How I use MACD

I don't use it by itself unless I must do so because of limited selection of other indicators. For example BigCharts.com does not offer a BBwidth indicator.

I have found that the signal line is useless in Daily charts as I have shown ..... but trending the peaks and troughs is better...

Look at this chart of our friend BAC





The first thing you see when you eliminate the signal line is how clean the MACD chart looks...the useless histogram is gone and now you can trend the peaks and troughs.

The early part of this chart has a huge red flag to me. In the dashed blue line see how the share price of BAC is rising .... but the MACD is static then falling. If I were into BAC and saw this I would have slapped a limit stop-loss order on this sucker pretty quick. Suddenly this stock plunged and I suppose it caught many by surprise but you, by observing this contrary behavior had a heads up months in advance.

the breaking of the trend line corresponds reasonably well to major price trend changes

BUT this is not really how I use it.....Let us mate the MACD chart with the Bollinger bands and BBwidth and see what we get.

Put this will be a huge post so we will break here for the time being....the next post IS VERY IMPORTANT. it will be full of neat tips

Okay, you have been patient with me...we still have one more indicator to add but just this pairing of Bollies, MACD and BBwidth will improve your chart reading to no end.

It is impossible to show you everything to look for in one chart. We will find more and more stuff in the charts we look at. So what we will do right now is look at the 4 charts that we started with when we began this exercise... that is Enercare [TSX:eci], Berkshire A [BRK/A], Silver (EOD) and Unilever (UL) as an ADS.

We will look at each chart and create 3 comment sections (Bollies, MACD, and BBwidth) then we will look at the combination of the three....lots of stuff here so let's get started

1) Enercare Inc




This is a pretty sweet chart to read....everything is clear with little complication...But there are still many interesting features to help you in your decisions

a) Bollies

(1)

There is one feature here that is very important and that is where the share price rises above the upper bollie. I don't mean just peaks over but rather it rises high above the upper bollie. The price does not belong this high...over 90% of the values making up the 20daySMA lie between 2 std deviation units of the 20daySMA and that is the upper and lower Bollie.

So Look at how long the price stays above the upper bollie....not long, eh...2 to 5 days max. Then it will pull back into the Bollie envelope. Arrows a & b are absolutely no problem...see how they renter on a neutral or positive slope...this is very bullish. Arrows c and d are more troublesome as there is a severe pullback... could be a head fake or it could be nothing serious....you need help in evaluating this....and it is there!

b) and c) MACD and BBwidth

the two are mated at the hip here.

I used the green lines to show a buy and red to show a potential sell....these would be more of a swing play...not a long play

look at the first green line on the left.....now look at the MACD trend....it has a slight positive slope and the BBwidth is pretty flat with a very slight positive drift....... NOW look at the Price versus the upper bollie and 20daySMA (dotted line)... See how the price stays above the 20daySMA and tight to the upper BB....that is bullish
So it is no surprise when the price takes a jump

look at the red line to the right of the green. Follow it up to the BBwidth...see the reversal of the BBwidth slope...up to the MACD ...its slope has reversed too....IF YOU WERE MAKING A SWING PLAY, this would be where you sell. BOTH indicators have to make the reversal.

You continue to follow the share price and look at the dotted blue box area.... the BBWidth is back down to the level where dramatic changes happen ... the MACD is steeply declining... the share price is in decline too and is now hugging the lower BB....without any more help the only conclusion would be that this is bearish. You would have to be psychic to see that sudden rise... {sigh} you cannot catch every fish.

But if you did the next red line is the sell sign for a swing play...see the reversal of the MACD then a couple of days later the BBWidth reverses BOTH have to reverse before the signal is complete (actually I jumped the gun by a couple of days in drawing that red line

Now we come to the third green line. See how the MACD has increased its positive slope in the previous 2 weeks, see the share price move to the upper BB..this is bullish so when the BBwidth turns ups uddenly (The BBwidth is the trigger) you buy...but merde! the price goes above the upper BB and falls... should you panic? should you sell?

Look at what is going on in the blue box. that is a sudden drop in price.... the BBwidth stays flat...the MACD dips slightly....BOTH indicators are not moving in tandem...So I would set a limit Stop loss around $13.40 to protect myself....Hold my breath and you are rewarded when the stock recovers.

Conclusions

I am going to stop here and to another in the next major post... more stuff would be too hard to digest for you

but what rules did we learn

1. The direction slope of the MACD when the BBWidth is in the "trigger" zone....if it is falling it is bearish...if it is rising it is bullish

2. However...don't be premature in your judgement...wait for the signals to be complete...protect yourself if you are not certain with a limit Stop loss... this allows the price to rise but protects you if it falls.

3. Prices rising above the upper BB or falling below the lower BB don't stay there long. If they are miles above the upper BB and pumpers are yelling...."Man, this is going to the moon, a 3 bagger at least"... don't listen to them and sell and take your profit while the interest is there....YOU KNOW it will pull back in a day or so.

4. If you see a potential head fake, check out the MACD and BBWidth indicator...they will tell you if the reversal is real or not.


Good Trading ..... the next major post will be tognit or early Saturday

Another positive week...this makes 4 in a row. Badger Daylighting has made a positive impact. It seems that Base metal mines are looking more positive...I will have to take a look at Lundin Mines [TSX:LUN] to see if it is moving to the bullish.

Here is the status of the portfolio at the end of today's trading

Underexposed 

Good Trading ..... the next major post will be tognit or early Saturday

Nice post! I wonder if this could be applied to charts that don't take time into account, like a tick or volume chart.

I tried this approach on a 2000 tick chart of the ES on Friday. There was a long setup that was a head fake, but it was quickly identified as such by the falling BBwith and MACD. We could have avoided that trade because it was against resistance (previous high of day). Soon after that there was a short setup that was the correct trade.

Thank you very much for your input and example

I have rearranged the chart a bit by putting the BBwidth on the bottom and that MACD on top of it. The reason (and I have not discussed this yet) is that you can more easily see a formation I call "MACD/BBWidth pinch" This is a great predictor of a bottom to a bearish run....it may not be the final bottom, it may only be a rest before falling further but if you were shorting it would give you an excellent "reason" to cover the short.



I have circled the "pinches" in Blue

The same formations that I have shown in a normal daily chart are there in the tick chart BUT they do not seem to be as well defined and I suppose that is because the intervals are not equal.

It would be interesting to see the same interval as a tick chart and then as the corresponding time chart....you could take a shorter time interval for test.

The dotted blue circles surround the MACD/BBWidth Pinches...Ideally one would want to see the MACD turn sharply up and the BBWidth turn sharply down, but with the irregularity of the y-axis I don't know if that is going to be that clear.

For the heck of it I added a trend line as soon as the trend upward was established....the BBwidth trigger (green line ) to me is just a confirmation the trend will continue....see how the red line, which is basically peaks of MACD and BBWidth down turning...showing the end of a bullish run, crosses the trend line when that support is breached. To me that would be the concrete sell point....for a nice gain.

You have given me an idea that I want to look at further....I basically wait for those "trigger" opportunities for buys and sells....the consolidation after the rises and falls if I hold them I wait they out with an eye to see if things will go seriously bad....but there are swing opportunities there and some predictability as you will see.

Can you generate the same chart with a consistent time base for comparison with the Tick chart???? that would be interesting to see.

5 min chart.

Let us restate the rules we have learned so far

Quoting 

1. Note the direction slope of the MACD when the BBWidth is in the "trigger" zone....if it is falling it is bearish...if it is rising it is bullish 2. Don't be premature in your judgement...wait for the signals to be complete...protect yourself if you are not certain with a limit Stop loss... this allows the price to rise but protects you if it falls. 3. Prices rising above the upper BB or falling below the lower BB don't stay there long. YOU KNOW it will pull back in a day or so...5 days max. 4. If you see a potential head fake, check out the MACD and BBWidth indicator...they will tell you if the reversal is real or not.

Those head fakes often occur when in the "trigger zone" and there is a above or below the Bollies.


Let us look at another chart





For such an expensive stock, it is sure active...which surprised me.

I have circled in Black 3 instances where the price broke above or below the bollies

1.

Note how muted the MACD and BBWidth are after 2 days....aside from the fact price is below the lower Bollie. the real buy trigger came 10 days later. See the MACD strong slope ...it has started to rising strongly now. MACD usually leads a BBwidth trigger.

the pink circle shows a potential top to the bull run for the previous two weeks. It is ONLY a potential top since only the BBWidth has reversed direction...the MACD has basically plateaued.

NOW from a swing could you be faulted from taking a profit??? Buy @$196K sell @$206k...a $10k profit on ONE share...

BUT I rarely sell outright....I much prefer a trailing Limit Stop Loss...this takes the emotion out of the sale. So I might set the Limit Stop-loss at $203-$202. There is no clear reason to sell (we have another indicator to help us but that is discussed later) and we are rewarded as the price continues to rise

2.

It looks like we are in for another nice bounce....but Danger Will....Danger!!!! , a Lost in Space reference

The price is above the upper BB and the BB's are not rising as fast. Look at the MACD and BBWidth...they are reversing direction....NOW is the time to collect that 5 week swing profit.... two bearish signals to me says sell....Buy @$196K sell @$212k... a $16k profit even better.

3.

We are watching the stock looking for another opportunity. We are traveling horizontally in a channel when suddenly the price spikes down. Start of a huge bear run???? NO, look at the BBwidth....it is falling... not rising... the MACD is flat then rising....falling below the lower BB exposes another head fake.

The clear Buy signal comes 2 weeks later. The BBWidth and MACD give you that gut feeling things are going bullish but it is that sudden increase in slope that cements it.

Conclusion

No real new rules here, Just confirmation of our established rules....there is one thing I want you to check out though.

What happens when a bull or bear run is over??? Hint it involves the 20daySMA (dotted middle BB line)

Next major chart this evening.....

PS. I love the response by @Malthus....it is discussions like this that move me in unexpected dirtections

Excellent!!



See how much cleaner the charts for the indicators are.

ALSO look at how well defined the incidents where you are above or below the BB's

In these cases the sell signals come from rising far above the upper BB's

the buy signals so far are more subtle....that should change when we add one more indicator...but I won't talk about that until I discuss 2 more charts.

In the second case where there was that gap...I drew a trend support like... it is another clue to good things as this rising slope was contrary to the drop in MACD/BBwidth.

To me Charting is much like reading a mystery novel....you are collecting clues , looking for a consensus

I assume that the end of the chart is the end of the trading day on Friday

Look at the position of the BBWidth.... ripe for a rise
Look at the position of the MACD... neutral with a slight rise
Look at the position of the prices in the the BB envelope... the last 5 are above the 20daySMA

I would watch closely at the opening on Monday...Not sure when that happens in North America... it looks like a potential bullish swing trade in the offing to me.....but it is a watch...the buy is when the MACD and BBwidth change to a very abrupt +ve slope.

I am sure there are advantages to a tick chart but I find the 5 min chart easier to read... I wonder if a 10 min chart is even better....this may weed out the really short runs

Edit - 6:30PM

I took another look at this chart...especially the time frame between the two charts and I see my thoughts that the time chart showed the end of day trading...and looking at the tick chart I see that was false. My advice of watching the time chart was bang on though....I advised that things looked not bad but to treat it as a watch... not buy and that turned out looking at the times on the tick chart...soon after the price fell.... always wait for that BBwidth trigger...jumping the gun is spinning the one bullet cylinder on a revolver and pulling the trigger...occasionally you get shot

Ok...here is the Silver eod chart





the first buy and sell was pretty straight forward for a 3 weeks swing from mid June to early July. The bearish run starting on July 25 is pretty straight forward....note the drop below the lower bb only slowed the rise of the BBwidth it did not plateau or reverse direction so it was no head fake.... In the region in the big dotted red circle there is no clear bottom...at best there is a weak rest point....but look how tight the price is hugging the lower BB....that is very bearish.

But on Oct 7... there is a very definite bottom indication with the MACD/BBwidth pinch and it is time to cover your short (if you can short a commodity (I don't play commodities) ) ....Is it bullish now?... nopes, it was just resting and on October 28 there is a clear sign the commodity price will fall further...

One new thing to point out

When a run is over...the price tends to return to the 20daySMA...you see two examples of this in the pink circles in a bearish run. If they rise up this may be bullish....sideways not certain....neg slope not so good.

The other thing to see is in the dotted blue circle. Count them...one, two,three, four five times the stock closed below the lower Bollie. Though the drop seems bad... you EXPECT a pullback into the BB envelope




Sure enough...it pulled back big time the next day and the beginnings of a MACD/BBWidth pinch is forming.

That tool of watching the stock fall above/below the bb's is VERY important.