Using
Complimentary Indicators: MACD, Moneyflow & CCI
In this issue of ChartFilter
we'll look at the use of a complimentary set of
indicators; MACD and Moneyflow, with the assistance
of CCI. MACD is a trend following indicator,
and often able to capture the majority of the
move when a significant trend develops. As a trend
following indicator, however, MACD sacrifices
early signals in exchange for keeping you in line
with the trend. When the trend is short lived
MACD often proves unreliable.
The moneyflow indicators
(Money Flow Index [MFI], On Balance Volume [OBV],
and Price Volume Trend [PVT]) track the flow of
money into or out of a market. Price typically
follows moneyflow and will eventually move in
the same direction. These are considered leading
indicators of future price movements, and
therefore perform in a complimentary fashion to
many of the other indicators, including MACD and
CCI.
CCI is usually used
as an overbought/oversold indicator, and can also
be used for timing buy/sell signals.
CURRENT TRENDS
- Learning from current markets
Today's markets are
not only volatile, but they're downright brutal
-- and generally downtrending. It's difficult
to make money (and hang onto it!) even in the
best of markets - but when the majority of stocks
are going downhill, the going gets even tougher.
The only way to make
money in these markets is to be psychic and patient.
Well - not quite, but you get the idea. You need
extra discipline and a reliable set of tools to
get you into the money and keep you out of hot
water. The MACD & Moneyflow combination is one
system that can provide good insights into specific
stocks and can assist you in catching trends as
they develop. Let's see how these indicators can
be applied to specific stocks...
In the chart below,
I've plotted Tellabs (TLAB) along with MACD and
MFI. For this set of indicators I find the following
trading rules can be very useful:
- Buy when
the MACD oscillator (both lines) crosses upwards
through Zero, IF the following rule holds true.
- Buy only
when MFI is trending upwards (and, if selling
short, do so when MFI is trending downwards).
- Sell when
the MACD histogram crosses down through Zero.
As shown by these charts,
you can see that the MACD oscillator is very useful
for capturing the bigger moves, and MFI often
provides valuable assistance. Using this system
you would use MFI to either confirm or override
MACD; that is, when MFI is trending downwards
or sideways, you would ignore MACD buy signals.
Personally, I recommend waiting until both of
the MACD oscillator lines cross the Zero line
before taking action based on the buy signals.
As you can see from the above chart, you might
be wise to sell an existing position when the
MACD histogram goes from positive to negative.
This system isn't foolproof,
however (unfortunately, they never are!). Let's
take a look at another stock using this system;
Cienna Inc (CIEN).
In the chart above,
the first buy signal was accurate, however the
second buy signal would have been misleading,
even though the MFI was uptrending. This confirms
the statement at the beginning of this newsletter
-- when the trend is short lived MACD often proves
unreliable. Thus, I recommend using a third indicator
- CCI - to provide further insight. Here's CCI
plotted for the same stock (CIEN).
Compare the MACD and
MFI charts with the CCI chart. CCI is a commonly
used overbought/oversold oscillator. Generally
speaking, you use CCI to warn of an overbought
condition when it goes above +100 and an oversold
condition when it goes below -100. For the sake
of this combination of indicators, we consider
whether or not the latest signal offered by CCI
confirms the other two indicators. If CCI makes
a sharp dip below -100 and then back up through
the zero line, we consider this a buy signal (and
vice versa).
You can see in the
charts above, that the CCI indicator did
confirm the first buy signal and the sell signal
in the middle, but not the second buy signal
(marked Pt A on CCI chart).
So, we can add a fourth
trading rule to our system:
- Buyor sell
only in accordance with confirming signals from
CCI.
I recommend you experiment
with these three indicators on your own. Plot
the MACD oscillator and histogram and compare
the signals with those offered by the various
money flow indicators (MFI, OBV, & PVT). Then,
once you've found a combination that seems to
work, use CCI for a final confirmation (or rejection)
of the MACD and moneyflow signals.
TIPS & TECHNIQUES
- Using this combination of indicators
MACD is a trending
indicator, telling us whether a stock is in an
uptrend or a downtrend. As I've written on many
occasions, the direction of the long-term trend
is the first assessment you should make for any
market. If it is trending up, you want to be buying.
If it is trending down, you want be selling.
MFI, PVT, & OBV:
The Money Flow Index was developed as a real-time
variation on the On-Balance Volume indicator.
Instead of using each day as a reference point
(as OBV does), MFI analyzes each trade. And instead
of ignoring the price or the amount that the market
is up or down, MFI weights each trade by price.
Although the interpretation
of PVT is similar to the OBV and the Accumulation/Distribution
indicators, PVT more accurately demonstrates the
flow of money. PVT adds only a proportional amount
of volume to the indicator, whereas OBV adds the
same amount of volume not considering whether
the market closes up a fraction of a point or
triples in price.
CCI was designed
to identify the beginning and the end of market
cycles. It indicates the price is increasingly
high compared to average prices as it moves towards
+100. As the CCI drops towards -100, it indicates
that the price is increasingly low compared to
average prices.
For more detailed information
see the ChartFilter reports on MACD,
MFI [as well as
PVT & OBV]
and CCI at ChartFilter.com.
Putting
ChartFilter into Context
ChartFilter
is meant to complement your overall trading knowledge
and decision-making. This newsletter focuses
on applying technical analysis (TA) methods
to various markets; but this is not to say that
you shouldn't be considering important fundamental
criteria, such as EPS or revenue, as well. Think
of ChartFilter as your TA assistant; not as your
overall trading strategist.
