FEBRUARY 8, 2014 IBD MEETUP/NORTHRIDGE LETS MEETUP TO DISCUSS FIRST QUARTER 2014 INVESTMENT STRATEGY
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 12-day 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.
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 • 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 • Studies that use a combination of prices and volume data to draw inferences must understand this relationship to avoid skewing data. • 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 • 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 WE WILL REVIEW THESE MONTHLY AND NARROW TO A FINAL TEN