(See part 2 here.) Alright party people, it's time for part 3. If you're not excited about this, you may have some issues that need to be dealt with.
Here's a quick recap from part 2. If we look at the technical chart for ACL, we have the stock price graphed against time, the moving average, the volume, the MACD (pronounced Mack-Dee), and the stochastic indicators. Remember the MACD graphs the trend momentum (trend is your friend), and the stochastic goes back and forth (usually) between over-sold and over-bought. Using the Yahoo Finance technical charts, the stock is over bought when stochastic is above the 80 line. It's over sold when it's below the 20 line.
So lets chat about the magical MACD and the concept of trends, and trend momentum. I call it magical, because if read properly it will be one of our best signals our buy and sell decisions. Take a look at the close up of MACD graphed below.
In the picture above, the volume is the top section and the MACD is the lower section. If you only leave with one thing, remember this. We don't care as much as if the MACD is going up or down, we care about the relationship between the blue lines (MACD) and the red line (it's signal line). The red line weaves in and out of the blue, much like a moving average. But here, we call it the MACD signal line. We care about where the MACD is in relation to the signal line. It helps to mentally draw a line along the ends of the blue lines, like seen below.
I've drawn in a green line along the tips of the blue line. The MACD is graphed as a histogram, so the blue lines may head up or down from the center (0) line. Please don't miss this. The green arrows above are showing where the MACD crossed above the signal line. The red arrows show where the MACD crossed below the signal line. That is what we are looking for. That is, when the MACD is crossing its signal line. Secondly, we can see there in middle October, the MACD crossed above the signal line (2nd green arrow), and it lined up above with a volume increase. So we lined up 2 indicators there. The MACD crossed up, with a substantial volume increase. This is a buy signal. And we can see here what happened following our buy signal; the MACD continued to rise and play above the signal line for the next 20-30 days. We officially got a sell signal there in middle November (the red arrow above), where the MACD crosses below the signal line. So lets see what really happened for those 20-30 days.
Here's the tech graph for CME. Had we played for real, we would have acted on our buy signal in late August. Sold on the sell signal at the turn of October. Re-bought on the buy signal in early-middle October. Sold on our sell signal in middle November. Now why did we buy and sell? Why didn't we just buy in late August and hold indefinitely? Well, at the turn of October 1st, we received a sell signal. In real time, there was no way to know that it was going to head back up in 10 or 15 days from the sell. It could have started tanking. We wouldn't have known. Maybe in early-middle October it was starting a long season of selling. We don't want any part of that do we? Not with the stock at least. We buy when it's time to buy and sell when it's time to sell. Will you be wrong sometimes? Yes. Will you sell too early sometimes? You might. Would you have taken substantial gains anyway? Yes. Rule number one is "Don't loose money". If you continue to take gains, don't complain. Again, I buy and sell at the wrong time all the time... every month. You won't be perfect, but you'll be good, maybe even great.
In part 4, I'll talk a little more about the MACD, add in the Stochastic lines, and elaborate more on the importance of volume. Remember, we want multiple buy and sell signs. One or two is woopty doo. But three, four or five is where we'll thrive. (sorry for the cheesy rhyme). In part four we'll also talk about rule number one. Personally, I don't have a rule number two... I just have several rule number ones. Like "trend is your friend", "all boats rise and fall with the tide", "don't loose money", "follow the money", "only best of breed", "just say no", and stuff like that. It will be a fun time for all. Now try analyzing some charts on your own. Feel free to use my "ticker time" to view the technical charts of stocks on my personal list.
Thanks for Part 3. Now I'll wait for Part 4.
Hey Matt - nice financial stuff. I'm enjoying the reading. Thanks Will! I had your posts 2 and 3 bookmarked in bloglines for quite a while. I finally got to them today while catching up on old posts. I really enjoyed them. But where's the part 4 you mentioned? I can't find it in the wall street section of your site.
