What is MACD?
by Rooney Yong

The popular “MACD”, Moving Average Convergence Divergence (MACD) is a trending indicator, telling us whether a stock is in an uptrend or a downtrend.

Developed by Gerald Appel in the 60s, the MACD Oscillator is composed of two lines: the MACD line, which is the difference between two exponential moving averages (EMAs) and a signal line, which is an EMA of the MACD line itself.
The signal line is plotted on top of the MACD to show buy/sell alerts.

Generally, MACD uses a 26-day and 12-day EMA, based on the daily close, and a 9-day EMA for the signal line.

There are two techniques commonly used to interpret the MACD:

1. Signal line crossover - When MACD line drops below the signal line, it is a bearish signal indicating that it may be time to sell or go short. Conversely, when the MACD line goes above the signal line, the indicator gives a bullish signal, suggesting that it may be a good time to buy.

2. Zeroline crossover - When MACD line cross above the zero line, it is a bullish signal. Some traders consider the zeroline corssvoer to be more reliable than signal line crossover which is more prone to whipsaws.

3. Divergence - When the stock price moves in opposite direction to the MACD, it signals the current trend may come to an end. Negative divergence is that when stock price creates higher high but the MACD fails to reach new high, be on the alert that the recent price uptrend move may reverse. Positive divergence is that when stock price hits lower low but the MACD fails to create lower low, it signals that recent downward movement of stock price may end and stock price may resume upward movement again.

MACD signal line crossover

On the right is a candlestick chart of a stock with MACD crossover signals at the bottom. You can see that for this stock the MACD signals have been quite accurate, giving 5 crossover signals between April and August. I would have no complains with this indicator.

First signal In mid April, the MACD line cut below the signal line triggering a sell signal and the stock price corrected for a few days.

Second signal Then in end April, the MACD cut back up the signal line giving a buy signal and we can see the stock price staged a nice rally.

Third signal At the end of May the MACD line cut below again. </span>The stock price corrected briefly. The MACD line then stayed below the signal line for one month with the stock price moving side-way.

Fourth signal Early July the MACD line cut above signal line again giving a buy signal and a nice rally.

Fifth signal End July MACD line cut below signal line giving sell signal.

MACD Divergence Signals

On the right is a candlestick chart of a stock with MACD divergence signals at the bottom. MACD divergence signals do not happen very often BUT the accuracy is quite high. You can see that for this stock the MACD divergence signals occurred twice and both signals have been quite accurate, giving 2 MACD divergence signals in February and March.

First signal : At the end of February, when stock price rallied to a Higher High, we can see that MACD rebounded BUT only to a Lower High, this is a sign that the upward momentum may be losing steam. After the MACD divergence, we can also see that there is a bearish engulfing candlestick chart pattern (a negative reversal signal also) raising the probability that the stock is likely to correct soon. And so it did dropping over the next few days.

Second signal : In early March, we can see that the stock start to stabilize and has not created new lows. In fact it created a Higher Low in the middle of March while the MACD line created a Lower Low. This divergence signal indicated that the downward trend may end soon and so it did, moving steadily upward again.

This was further confirmed by the MACD line cutting above the signal line.

Weakness of MACD
Many traders will tell you that the most common problem of using MACD is that it is a lagging indicator since it is based on averages of historical prices.

However, it remains one of the most favored tools by many traders and should be used in combination with other tools. Also, MACD signals although lagging, still give earlier signal than the basic moving average crossover signals.

Note When using any indicator, do not just rely on the signal from one indicator, it is always good practice to combine the signals with other indicators to increase the probabilities.

Personal tips
Past pattern will also give you an insight into potential future behaviour.
If previously the stock reacted in a specific way to the past signals, the odds of it reacting in the same manner in future is likely to be higher.

Technical analysis indicator - Directional Movement Index (DMI)

DMI was designed by Welles Wilder Jr. who also created the popular relative strength index (RSI).

DMI is made up of three lines :
+DI line
-DI line
ADX line

DMI is a “trending indicator” and often used to check if a trend is present and also the strength of the trend. DMI works on all time frames and can be used for any markets eg. stocks, currencies, options, warrants, exchange traded funds, futures and commodities. +DI line basically moves in the same direction as the underlying securities or stock while -DI line moves in opposite direction.

How to use DI lines :
Buy signal is triggered when there is a crossover ie +DI line moves above -DI line and sell signal when +DI line moves below -DI line. The time periods most commonly used are 10 or 14 days. I prefer to use 10 days since the signal can be triggered sooner and can use it to confirm with other indicators.

One must take note that crossovers of the DMI lines alone are often not very reliable because it may provide false signals when market volatility is low ie range bound and late signals when volatility is high ie trending market.

Divergence signal using +DI line :
Divergence occurs when DMI and stock price disagree with one another.
For example when stock price makes a HIGHER high, but the +DMI makes a LOWER high. This is considered as negative divergence and is generally a warning that upward momentum is losing strength and commonly precedes a retracement or reversal. This should be confirmed with other divergence signals eg by look at moving average convergence divergence (MACD).

How to use ADX line :
A rising ADX line means that the market is trending and as such more suitable to use a trend-following system. A falling ADX line indicates a non-trending or range bound market.

Some traders also look for ADX crossover signals. For example, when ADX line moves above 20 or 25 line, it may be an early signal that market momentum maybe gaining. So if the stock price has been moving up past few days, it could mean more potential upside. But if the stock price has been going down, it could mean more potential downside!!

Also when ADX line goes from above 40 line to below it, that could be an early sign that the trend is weakening.

Some suggested ways to use DMI :

1. A good buy signal is triggered when +DI line is above -DI line AND ADX line is in between the two lines.

2. To avoid whipsaw, do not buy when +DI cross -DI for the first time, wait for a pull back. Buy when price moves up again and break the high of the first day when +DI first crossed -DI.

3. Use higher high of +DI to confirm that uptrend is in tact

article by : RooneyYong ( Email )

Singapore Stock Market: Straits Times Index (STI)

Based on Fibonacci Retracement : STI retracing back to support level of around 3320 which coincide with fibonacci retracement level of 61.8%this level is also a 100% retracement level for the recent rebound which started on 22nd NOV Since 3320 coincides with TWO fibo retracement level, this should offer some good support levelof course nothing is 100% certain so have to watch out cos if 3320 level is broken, the next two support levels could be 3249 and 2962Based on Parabolic SAR :this indicator just turned negative two days ago…..not a good sign for nowusually parabolic SAR will stay negative from between 9 to 17 daysBased on multiple moving average (MMA) indicatorsThis is usually a medium to longer term indicator….sad to see that all short term MMA are BELOW long termm MMA so the medium to longer trend is still not good

Some people would say that MMA is a LAGGING indicator. but i dont use this as an “entry” signal but rather to give me a feel of the market so it is still useful for me

Cheers
Rooney