Don't Ignore This Chart!

Here's How To Use The MACD For A Sell Signal

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My favorite indicator, other than the combination of price and volume, is definitely the MACD.  I've studied it for years and I use it as a very important momentum indicator in my trading strategy.  It's mostly a lagging indicator as it uses prior closing prices to determine the difference between two moving averages.  But it also provides us a predictive benefit as price momentum begins to slow before we actually see prices deteriorate.  As an example, let's look at the chart of Oclaro (OCLR):


For two months, prices rose and were accompanied by higher MACD readings.  That's a signal that momentum is strengthening because the short-term moving average is rising faster than the long-term moving average.  Pullbacks during such advances tend to be shallow and the rising 20 day EMA typically is problematic for sellers of the stock.  But after a negative divergence emerges, you have to begin looking for an exit point, especially if you're a short-term trader.  In mid-September, OCLR printed a negative divergence but on that breakout, volume exploded higher.  It's difficult to argue a stock is losing momentum when heavy volume accompanies a breakout.  This is very important - remember that the MACD considers price only, not volume.  So a better sign to me with regard to slowing momentum is when the negative divergence occurs with light to moderate volume - as it did earlier this month.  Volume was average on the last breakout.  You don't want to be buying stocks breaking out on average volume with a negative divergence in play.  Instead, show patience and discipline and allow stocks to "reset" their MACDs at or near centerline support.  If OCLR prints a hammer today on its 50 day SMA, we could see this become a very tradable bottom in the near-term.  At a minimum, it's certainly a much better reward to risk trade now than where it was with the negative divergence emerging.

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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