When it comes to MACD…12,26,9 is the stock and most widely used setting. Often stock settings have the most eyes and are the most valuable when it comes to indicators. In my example…12 is the slow EMA, 26 is the longer EMA and 9 is the smoothing line. The moving lines you see on plotted MACD are 12 (slow EMA) and 9 (smoothing line), the 0 horizontal level represents the 26 (longer EMA). In the background on MACD you’ll often see a histogram, this measures the difference between the slow EMA and smoothing lines and plots this data in an easy way to watch momentum change incrementally. Both pieces of MACD are useful for spotting momentum shifts and divergence.

With 3 lines of interest plotted you can have 2 major crossovers.
1)Slow EMA crossing the fast EMA (0 line) (red circle & arrows)
2)Slow EMA crossing the smoothing line (black circles & arrows)

Most use the slow EMA crossing the smoothing line as indication of a momentum change. Sometimes on longer time frames like the above weekly there is no divergence needed for a mid term reversal and when slow and smoothing cross its a big move. See the below link for an article I wrote on divergence.

http://www.tradersbase.com/forum/technical-analysis/469-whats-divergence-diverging-indicators.html

Note: The most recent down move has built bullish divergence (green lines) where price tested lows yet the MACD as well as the MACD histogram failed to even come close to their prior lows. This was a VERY bullish indicator. I would have preferred the volume had been lower on the 2nd test giving a 2nd and more important diverging indication though. That would have told me there were less sellers at a prior key level and we didn’t get that so I’m not a total believer of this rally yet. I will become more bullish if/when the same level (or lower) has very low volume aka: brings out very few sellers. I will become full bull when the red downtrend and structure resistance are cleared and legitimately defeated.

A failed signal is the best signal

Some people say that a failed signal is the best signal. Im not sure if it the best but often times if you catch a true failure then you can nail a big move.  One thing that I look for is what I think is a fake breakout used by shorts as a chance to dump into some buying, giving me the heads up a big move down is about to occur.  Today I got a great example of this in the S&P mini futures. Below are 3 charts of the 5min ES from todays action, these will help give you a rough idea of what I saw hapen in the moments leading up to the sell off.

part 1 - what everyone sees setting up

part 2 - the fake breakout, then complete failure ( the bottom of that word bubble cut off the word failure)

part 3 - the result

How about an S&P 500 heatmap of 6 month performance. This shows what’s actually holding up since the bear came out about 7-9 months ago.

Hidden buying and selling?

In the forum we have had some talk of hidden buying and selling and some questions were asked.  MC started a thread to help answer the question here  http://www.tradersbase.com/forum/technical-analysis/663-define-hidden-selling.html    You may not like to trade off volume alone but I think it could be a big help to any trade set-up.    Today I just so happen to see something that fits into this topic.  Below is a chart that points out some possible hidden buying that tipped me off to look for a long set-up on an intra-day basis.  

    What I saw was a large spike in volume (biggest of day) with a short body candle after a big swing down. To me this means that buying volume has stepped up to soak up the sellers. Had the market been moving up strong going into that I would of seen it as sellers dumping into the buyers.  This gives me the okay to take a long signal, today it worked out for a good day trade.

SUMMER READING:

Looking for some summer reading material?   Here are a few books to help improve your trading

What is a gap?
A gap is shown on the charts any time you have price open outside the prior time period’s high or low.
The below section will go into details on why gaps on big volume are significant and how you can take what I’m teaching and use it to recognize the psychology behind those moves. There will be small gaps or gaps on low to normal volume. These are events of no interest to us. It’s the gaps on abnormal volume that should catch your eye and make you want to know what they did that for. Bottom line…large volume is the pros at work, our job is to realize why they are moving that many shares and follow their lead.

Bigger notable Gaps are used for 2 purposes…

1) A breakaway gap moves fast and is used to eliminate concerns of supply slowing the run. The breakaway gap is used so they can accomplish 2 things. One is to lock OUT new shareholders from playing along because it’s “too high”. The 2nd thing is to lock IN people that are in the red, which avoids weak hands selling into their rally. This elimination of supply ensures a continued powerful move. This is generally done on a beat up play once big money have their fill of cheap shares. They could however use this to panic people into selling, using peoples greed against them on all time highs. The latter is a way the pros could buy high knowing they will soak up the float and sell higher. This is very rare in my experience however, pros don’t like to pay a premium.

(HINT) Look for any pullbacks to be UBER light volume if it’s a legit breakaway gap. This could be played by trying to get in as close to the low of the gap as possible to ensure a tight stop.

2) Any other gap would be used by pros to hide their own supply trail. These gaps would create early excitement as well, but in this case to sucker unsuspecting traders in.

(HINT) This type of gap tends to have the next day close lower on fairly big volume. Often you will see a retracement and then a test of the prior highs on UBER light volume showing the professional money has no interest at paying the current price. A downtrend commences till the pro money buys back in. This could be played waiting for that test of highs and then fading the move once volume ticks up showing emotional trading.

Here’s a good example of a short I called using a weak gap. It was a HUGE gap so “how could that be weakness”. I was told I was crazy for thinking of shorting, despite telling people to wait for the breakdown. Sometimes you need to be cautious no matter how bullish it may seem.

Enjoy, good trading.

I think we all know that with most technical indicators you can’t take every single signal, you can’t take every MACD cross, you can’t take every RSI oversold signal and so on. You would lose your money really fast.  So what needs to be done when using basic technical indicators is looks for signals, or warning signs of a potential move. Thats when you step in and take your signal.  Below is an example of a trade you could have taken today in the s&p futures market.  you can see steps 1 & 2 give me a heads up that I should look for a sell signal. Thats when you take the indicators signal, that way your not jumping in blind with full trust in an indicator.

“WWE looks like it may have based and try to pop in the near term. There is some solid resistance overhead though. I wonder what the overall market is gonna do, we may be near the base of the downtrend if we get positive confirmation tomorrow with any buyers and go on to break the channel.”

I’m learning alot by looking back at past thoughts and realizing patience is VERY important.

Here’s what we have…the blue dashed line is where I made the prior post on another site. You can see the bottom was put in as I called, but the “near term” was anything but reality. Thus my “patience” comment above. LOL

A bit after my post we had a test of the lows with macd divergence as a bullish signal. Also note this…basing under a long term MA like the 200ma here is a bullish sign often. Lots of eyes on that level and when it breaks it often goes BOOM!

In this case they gapped above the “supply zone” which is the blue boxed area and 200sma. They do this to accomplish 2 things, first this keeps those that bought in during consolidation from selling since they now are pretty well in the green and less fearful. This break away gap also keeps those not in yet from buying in at that level. The herd will buy in after it’s gone much higher, they just can’t take it anymore and think they are missing out. The laggards get in just in time for the hand off, pros take profit and the drop can begin. LOL
OH…who is “they” you might ask? That’s the big money, they run the show and they are good people to follow if you know their tricks.

Another tidbit besides the gap above “supply zones” from my arsenal…
Many focus on a 50/200ma cross. That’s great if you want to see what already happened. It’s often late if accurate at all (see the blue arrow). Try using a 21ema and a 200sma for better triggers. Why…easy, the short term is EMA because we want the most current data to be weighted and faster to fire a signal. The long term is SMA because that will reflect the more smoothed out and broad term data.

Ok and now a final note on WWE…the volume stepped in Friday as support at the 200sma/gap fill. That’s a low risk long for a bounce play right there. Gap fill backed by 200sma…double support backed by volume.

Another post I seemed to have over looked I recapped using the link below. I picked the SPY mid term reversal 1 day before it happened. Fade the herd baby, don’t be afraid because news tells you to be. Be smart though and don’t try to catch a falling knife.

http://www.tradersbase.com/forum/market-index-chatterbox/371-index-chatter.html#post3130

Have a good night!
MC

Here’s my view, we closed above that down channel pretty convincingly. As expected it’s stalling at overhead resistance on low volume, it’s time to base or pullback to test support most likely.

Now ideally we should get a test of the new support on the top down trend line.
Even better would be if it kind of hangs here for a few days and lets that channel line meet with the structure support below. There would be the king of entries if you want odds in your favor, double support for a long.

Note the red arrow, that’s your signal if your less aggressive and maybe the smartest entry of all. The channels/trendlines break and fake out often but a legit breakout of range followed by a test of that same level is a prime entry. Let’s see if we can get that smarter entry on a long here. You could play it short in anticipation of that test though it could rally with no warning and now I would look for long setups.

Yesterday (17th) I pegged a prime entry on the YM’s opening pullback to 12,570 for a long in the fourms chat. Today I nailed the opening trade again…long on a pullback to 12,780-12,790 was the call at 9:34am.

Then using the chart below I picked the prime short entry which worked quite well. The main reason for this post isn’t to brag, but more about why I prefer VIX 1000% over TRIN myself, it shows way more detail in my usage.

Compared to TRIN in the same point.

So yes TRIN moved up but it still was range bound, where the VIX showed a formation which had broken out and gave a great signal.

Good trading and I’ll see you in the chat next week.
MC