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Sunday, March 28, 2004
Good evening friends,
Market Overview
I am still not convinced that the market is ready for a rebound. However, it is still not time to go on an all out short because we are not in a bear market. I prefer to be in cash right now with eyes on long positions should we hit the 200 SMA on the NASDAQ. When and if all the indices go below their 200 moving averages, then we can take heavy short positions. Until then, we will just take a few short positions as they present themselves.
Trade Strategy
The market remains over sold and may see a bounce. The NASDAQ is trapped between its 200 SMA and the short term down trend line you will see in tonight's chart section. Until we can break either above the trend line or below the 200 SMA, this market is directionless and we cannot commit either way. For the time being, cash is still king and if you must trade, day trading is the only way to go in this situation. If you cannot monitor your trades on a daily basis, it is my opinion that you should not be trading at this time. There is nothing wrong with holding your cash for now.
The Game Plan
I have been trying to take some short positions on rallies into strength. The strategy is to get a 10% gain if the stock should meet that resistance and fall. We are setting our stops 2% higher then our entry position. If we are stopped out, then a 2% loss on the trade is an acceptable risk in the overall portfolio's bottom line. Using these tight stops, we can be wrong 5 times out of 6 times and still break even (assuming that the 1 winner is a 10% gain). I like those odds so these limit orders at resistance we have been placing are good risk reward ratios.
Know What You are Shorting
If the NASDAQ does rally, it is still okay to be short on stocks like AZO, KKD, and CL. I say this because these stocks are not technology stocks and if there is a rotation into tech stocks during a NASDAQ rally, these stocks should fall further. I would not hold short positions in stocks like QLGC, SNDK, or BRCM if the NASDAQ rallies. Even though these stocks are below their 200 SMA, they could still rally up when the NASDAQ does. These are heavy hitters in the NASDAQ and are not worth the risk holding short.
MACD
We started our indicator series last week with moving averages, and I would like to continue this week with the MACD.
MACD stands for Moving Average Convergence Divergence. It is another lagging indicator that represents trends on the chart. It is based on moving averages, hence the name. That is also why it is a lagging indicator, as you have already learned in the commentary on moving averages. The MACD is made up of two exponential moving averages (EMAs); a mid term average and a short term average. As with any other indicator, you can change the time line by changing the input characteristics. So, if you want to use the MACD on a long term buy and hold type stock, you would need to move your EMAs out to a mid term and a long term.
Common EMAs
If you look at charting websites or software packages, I believe the most common EMAs used are 26 and 12. The EMAs are represented in days, so in this case the 26 days is the mid term EMA and 12 is the short term EMA. There is a 3rd EMA which is present with the MACD. It is called the trigger line. In the standard formula, it is typically represented with a 9 day EMA.
The Purpose of the MACD
So what does the MACD do for you as a trader? The purpose of the MACD is to measure the difference between the two moving averages which you have specified. It is a gauge of how quickly the stock is reacting and moving either positively or negatively. If the MACD is positive (above the 0 mark), this means the short term moving average is trading above the longer term. If the MACD is negative (below the 0 mark), this means the short term average is trading below the longer term.
What does this all mean?
Well, positive movement in the moving averages is a way to start identifying stocks that have the potential for positive movement. Negative movement in the MACD would be indicative of a potential negative move in a stock.
The angle of the movement is also something to pay attention to. A very steep incline or decline will be a key to determining the strength behind any potential move. The steeper the angle, the more rapidly the stock price will move.
“But if it is a lagging indicator, how can I use it to predict future direction?”
The rate of change in the MACD can be used to help predict the most likely direction for the stock to be moving in the future. As I have stated before, you should not be relying on one indicator alone. The MACD used in conjunction with other indicators will give you the most accurate picture of the potential direction in a stock.
What we look for in the MACD is a crossing of the MACD line (the darker/thicker line) over its trigger line. This signifies a potential move is coming. If the MACD crosses both the trigger line and the 0 mark at or close to the same time, that is even more bullish situation. The inverse is true as well. If the cross is negative, the movement is likely to be negative as well. The greater the angle, the stronger the potential move.
Divergence between the indicator and the current trend within the stock is a very good area to focus. If a stock is still declining slightly, but the MACD has turned north, that would be a very bullish sign. So even with this being a lagging indicator, we can still use it in our toolbox to predict future movement.
OTC BB to watch
Some OTC bb stocks for your watch list include MIVT, GDLS, INVI, ABTG, SPHC, AVCA, GZFX, and WWAT. WWAT was up 40% on Friday, and NEOP is up over 200% since first being mentioned here at .32.
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all tomorrow evening.
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