Friday, March 09, 2007

 

Finding the Bottom: Low Risk Entries Using the MACD and ATR.

I came home from work Tuesday evening to find my azaleas mulched, my leaves raked, my daffodils fluffed, and my monkey grass trimmed. It seems that your positive comments last weekend were enough to earn me an afternoon of yard services from The Fly's "illegal Mexicans." Left on my front porch was a case of beverages. I was sure it would be Monster. Much to my disappointment, the beverages turned out to be some kind of green tea...and diet, at that. See, that is The Fly's way of saying, "Good job. Now get the fuck over it."

For this weekend's installment, I want to take a look at a technique for locating low risk entries in stocks making new lows. This technique uses 2 indicators: The MACD and the Average True Range (ATR).


In the first chart, AIG completed a Head and Shoulders pattern, and has since persisted in a 3 month downtrend. The picture seems to be bleak for AIG. However, the MACD and the ATR are not confirming the price movement. As the price continues to make new lows, the MACD crosses over into bullish territory. On the day of the new low, the MACD crosses back into negative territory. However, the bears are unable to drive the MACD to make a new low. Instead, the indicator can barely be pushed below the trigger line.
The ATR is telling the trader that volatility is at relative lows, and while the price continues to move down, volatility has been consolidating for two weeks.


The second chart shows the MACD continue making higher highs above the trigger line while the ATR shows the volatility increase and then continue the primary downtrend. AIG goes on to make 10 points in 2.5 months.











The third chart is of GLBL. Note the price making new lows without confirmation from the MACD. The ATR smooths out and shows volatility consolidating while the price moves down.











The final chart shows GLBL confirm the MACD crossover and gain 30% in 2 months.
The key to using these indicators when screening for stocks at new lows is understanding what they are saying. The MACD is measuring the strength of the trend. As the movement of the MACD diverges from the movement of the price, the astute trader observes the bears losing strength. The ATR can be understood as a proxy for a measurement of fear. The decrease and subsequent stabilization of volatility (fear) as measured by the ATR suggests that as fear decreases, buyers are likely to be emboldened to step in and buy.

Traders may want to imagine the MACD anticipating the arrival of support; hence, it begins to trend in positive territory. Similarly, fear decreases as the stock stabilizes and support is anticipated.

This technique for identifying bottoms can also be used with 2 or 3 year weekly charts. On charts representing longer-terms, the trend changes may be even more powerful and last even longer than the intermediate-term trends illustrated in the charts above.

Comments:
How was a your diet green tea?
 
Could I ask you what is setting for ATR and MACD ?

Is it 14 for ATR ?
 
I cracked open one of the green teas diet, and was sipping it on the porch. My neighbor drove by, saw me drinking the diet, put his car in reverse, put down his window and threw a hammer at me. As he sped away, I heard him uttering something about "sissy boy...grow a pair."

14 for ATR and standard 12/26/9 for MACD. You can adjust the ATR and add a moving avg. and get some interesting readings.
 
Do you do any daytrading and if so do you believe MACD has a place? I realize that on a longer term basis MACD is more reliable than in the short term, however, I use it with 1,3,and 5 minute increments. When the MACD signal turns up on the one minute I may take a small position and then when it turns up on the three I usually add depending on general market conditions. I only concentrate my daytrading in certain sectors since that is where my experience has been over the years. Sometimes, when it comes to daytrading simple is best ie. buy them when they go up and short them when they go down and forget all the fancy crap.
By the way the new PC phrase for illegal Mexicans is "border challenged people".
Enjoyed reading this weeks commentary.
 
Caddy,
I daytrade, and in such a short timeframe, the only thing the MACD tells you is whether a stock is strong or weak. It works -I know plenty of traders who won't take a trade unless the MACD is sloped in that direction. On the other hand, it doesn't work in in range-bound markets. It's a trend indicator.
Speaking of daytrading, my conviction is that the daytrader's edge is speed and small size (relative to funds). The best scenarios for daytraders are when funds are "forced" to position themselves quickly, because daytraders are quick enough to get in and out in a hurry -and don't need to have more than several thousand shares on in a thick stock to make good money for themselves. This is the simple brilliance of dummy trading (as evidenced in some of the trader blogs I'm sure you've read).
I'm not a "dummy trader", but their idea is great. A good example is ICE on Wednesday. It was taken off the GS conviction buy list. It sold off in the morning on volume, formed a clear rising flag in the middle of the day on sharply lower volume, and when it broke the bottom of that flag it was an easy short.
My thinking is that one should exploit one's edge -I'd be curious to know what your trading style is. I don't use any indicators. I watch the ES and the tick to get an idea of market strength or weakness, and then I short the sectors I follow that are vulnerable or go long the momentum sectors accordingly. I trade steels, oils, brokers, exchanges, semis -whatever evidences a capacity to move intraday.
I'm changing my style a bit however in order to take advantage of news events, etc. I've made some money in the subprime sector lately and it has been relatively painless -when things go out of wack like that, stocks tend to trend strongly.
 
I have been daytrading full time since the late '90s. I traded part time prior to that and I have learned over time one needs to adapt and change or perish. A good example would be the prolifiration of sector ETFS which didn't really exist (at least not liquid enough to daytrade) several years ago. I follow the largest two or three stocks in the ETF and then buy or short the ETF based on those individual stock movements. Its like the head fish leading the entire school in one direction. For example I watch AMGN,DNA to see what BBH will do or watch INTC,AMAT,TXN to see what SMH will do and NEM,ABX,GG for GDX.
I realize that this is contrary to what the "experts" say a daytrader should be doing in that the ETF price movement isn't as volatile but it does limit risk and you won't stroke out at an early age.
I have followed the gold stocks since the mid-80's and have generally gotten a good read on their behavior patterns. I also trade the Semis,Oils (OIH,XLE ETFs) and Biotechs (thru BBH,IBB).
I generally use relative strength (or weakness for a short) and the MACD I outlined above.
The only thing I agree with Cramer on is that OIH is easily manipulated by the Hedge funds and I believe the gold stocks are manipulated relative to the price of the underlying metal. The trick is trying to go with the flow and not try to be "smarter" than the market which is immpossible.
I agree that to be successful one has to have an edge and for me that is to specialize only in certain sectors and know them inside and out and forget all of the other noise.
 
The noise is definitely a problem, and honestly from a daytrading perspective, the fundamentals end up being a bit of hitch as well. The sectors that move usually have the most "manipulative" interest. Those are the sectors that the big boys are playing and they want to get what they're after. The OIH is a mess on wheels, but if you forget what you're looking at it trades well. I took a good loss Friday morning being short the OIH and XLE on the weak crude -and then made a better gain by shorting it once again in the middle of the day. When something runs up like that, and then tails off just as quickly, it's pretty clear that it's a trader's market rather than a position players market. The ETF's are great as far as I'm concerned -it's harder to mess with an index than a stock -if I catch a read on a sector, I can play the ETF and it responds to levels far better than an individual stock, especially these days:
http://www.tradingmarkets.com/.site/daytrading/commentary/wmgame/Heres-why-trading-is-becoming-more-difficult-50047.cfm
I generally trade based on underlying assumptions, which I realize is a bit idiotic for a daytrader, but it's the position I'm in and the read that I'm best at. I catch it on a sector and I can play it for days -and the ETF's represent the index, so I'm not subject to inscrutable action in an individual stock (although XOM's dominance of the XLE caused me some crap when XOM was bulletproof).
Thanks for the take on the market.
 
Quick Alert: 300 is the best fucking movie made since Gladiator.
 
Broker thanks for the advice, going to download it tonight! By the way we are getting roasted on FXY! What are your thoughts going forward on this bitch?

BTW I also want to be long water given this huge "so called" drought that the global warming mongers are portraying. I love capitalizing on stupidity.
 
Post message thought: I fucking want this so bad!!!

http://andrewkuo.net.nyud.net:8080/images/bigmonitor.gif
 
Gapping, find my previous post, re: Yen Carry Trade, and compare the current USD/JPY levels with the trendlines on those charts. That should give you an idea of where to hold 'em and where to fold 'em.
 
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