Back to Basics with MACD

One danger of getting “way to into” the financial markets is that you can find yourself progressing into some needlessly complicated stuff (“Hi, my name is Jay”). I mean it is only natural to wonder “hey, what if I divided this indicator value by that indicator value” and such. But once you start finding yourself taking an exponential moving average of a regression line with a variable lag time, well, you can find yourself “a tad far afield.” (Trust me on this one). Which leads us directly to :

Jay’sTradingMaxim #44: Every once in awhile it pays to remember that the end goal is simply to make money. The more easily the better.

So today let’s go back to a simple “basic approach.”

The Bullish MACD Divergence

We will define an “asset” as any stock, ETF, commodity, index, etc. that can be traded on an exchange (and for my purposes, there should be a liquid market for options on that asset).

Step 1. An asset price falls to a new 20-day low and the MACD value is less than 0. Note the MACD value on this date.

Step 2. Not less than one week but not more than 2 months later:

*Price closes below its closing level in Step 1

*The MACD indicator is above its level at the time of Step 1

Step 3. The next time the daily MACD indicator “ticks higher” a buy alert is triggered

Can it really be that simple? The Good News is “Yes, it can.” The Bad News is that “It isn’t always.” To put it another way, like a lot of trading methods it can generate a surprising abundance of useful trading signals. However, there is no guarantee that any given signal will turn out to be timely. In other words:

This method gives you a good guideline for when to get in, but:

*It may be early at times (i.e., price will move lower still before advancing)

*It will at times be flat out wrong

*You still have to decide when to exit the bullish position.

*Call options are useful with this approach as it allows you to risk a limited amount of capital.

Examples

Figures 1 through 4 highlight some recent examples using this method. Note that the charts show only entry points. Exit points are “a separate topic”.Figure 1 – Ticker XLF (Courtesy AIQ TradingExpert)Figure 2 – Ticker WMT (Courtesy AIQ TradingExpert)Figure 3 – Ticker AAPL (Courtesy AIQ TradingExpert)Figure 4 – Ticker GDX (Courtesy AIQ TradingExpert)

As you can see, some signals were quite timely while others were quite early. For the record, I started getting bullish on gold and gold stocks early in 2016 based in part on the multiple alerts that appear in Figure 4.

Jay Kaeppel