macd indicator
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MACD Indicator and Stochastics
Moving Average Convergence Divergence Indicator and Stochastics
I always like to start off with the monthly charts. Even though I'm going to
be doing most of my trading in the futures market, for the stock indexes I will
look at the cash index for monthly charts. This is because there is much more
history here to view, as the cash index has been around a lot longer than the
stock index futures contracts. The first thing I look at is the Stochastics and
MACD indicator (Moving Average Convergence Divergence) readings. The MACD
indicator represents "pressures" on the market. Is the pressure more to the
upside (buying pressure) or downside (selling pressure)? In general, I want to
establish positions that are on the same side as the current dominant pressures
in the market I am trading. My rule of thumb for this is as followings:
The Stochastics is the heads up, and the MACD indicator is the confirmation.
This brings me to why I place little value on whether a Stochastic is
overbought or oversold. According to the Stochastics the S&P was overbought
starting in the middle of 1995, and it stayed overbought until the middle of
1998--three long years. During that time this "overbought" market rallied over
100%. To me, an overbought Stochastic is actually a bullish sign--if the MACD
indicator is also in a buy. This brings me to my next guideline:
MACD indicator (Moving Average Convergence Divergence) crossovers. The
Stochastics is valuable in that it will turn first, and therefore it can give me
a heads up that a MACD indicator cross "might occur." That said, I don't act on
it unless and until a MACD indicator crossover actually does occur.
At point #1 the monthly MACD indicator crossed over into a sell signal in
May, 2000, about 2 months after the Stochastics crossed into a sell. Once this
happened, the path of least resistance on the monthly S&P chart officially
switched from higher to lower. This means that, for longer term swing and
position trades, I would start spending more time focusing on short setups, and
generally ignore long setups. I would do this until the monthly MACD indicator
went back into a crossover buy, and that happened at point #2, nearly 3 years
later. Once this occurred, I started focusing more on long swing trading setups
and generally ignoring most short trading setups. Remember, I'm talking about
swing and position trades here, not day trades.
The snapshot of this chart was taken on April 5, 2005. At point #3, I can see
that the Stochastics is trying to rollover into a sell. What does this mean to
me? It means that, potentially, the MACD indicator could roll over into a sell.
However, at point #4 we can see that the MACD is still in a buy. For me, this
means that, for longer term swing and position plays, I will still continue to
focus on the long side until the monthly MACD indicator rolls over into a
sell.
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