ChartFilter
Stock Screening Tips
Issue #6
Screening Bollinger Bands
and MACD
by
Alex Martin
John
Bollinger writes that,
"Trading bands are one
of the most powerful
concepts available to
the technically based
investor, but they do
not, as is commonly
believed, give absolute
buy and sell signals
based on price touching
the bands. What they
do answer, is the perennial
question of whether
prices are high or low
on a relative basis."
He goes on to say, "It
is the action of prices
near the edges of the
envelope that we are
particularly interested
in."
One
of the biggest mistakes
in technical analysis
is the multiple counting
of the same information
according to Bollinger.
An example of this would
be using different indicators
all derived from the
same series of closing
prices to confirm one
another.So in this newsletter
we will take a look
at using complementary
indicators as Bollinger
advised.
As
in the previous
issue, we will use
the same two-stage Bollinger
Band system.
 |
Signal
1:
Price
crosses center
line
Signal
2:
Price
penetrates outer
band. |
The
MACD signal we will
use is MACD crosses
through signal line.
The
basic MACD trading rule
is to buy when the MACD
rises above its signal
line. Similarly, a sell
signal occurs when the
MACD crosses below its
signal line. The crossing
of the MACD line above
the signal line can
denote the beginning
of a trend. An uptrend
typically pauses or
stops when the MACD
line crosses and falls
below the signal line.
Tips:
-
The
location relative
to the zero line is
also important in
indicating how strong
a trend might be.
A crossover above
the zero line is considered
more bullish than
one below the zero
line. The higher it
crosses above the
zero line, the stronger
the uptrend. If the
crossover occurs below
the zero line, the
uptrend is likely
not very strong.
-
When
the bullish crossover
occurs above the zero
line, the uptrend
gains more momentum,
and the price rises
with more intensity.
-
Bullish
MACD crossovers are
probably the most
common signals, and
as such, can be less
reliable. If they
are not used in conjunction
with other technical
analysis tools, these
crossovers can lead
to whipsaws and many
false signals.
In
this case we
will be using
the double Bollinger
signal to remove
the false signals.
The complete
signal should
look something
like the graphic
to the right.
The upper part
shows where
the center line
of the Bollinger
Band first crossed
the price line,
and then the
price line penetrates
the upper Bollinger
Band.
In
the lower part
of the graphic
we can see the
MACD rises above
it's signal
line.
In
this screen
the MACD may
cross at any
value above
or below the
zero line. Crosses
below the zero
line and a steep
slope on the
signal line
are the most
useful. Crosses
above the zero
line are in
bullish territory
and may prove
to be less accurate
since they tend
to occur towards
the high end
of a stock cycle.
Comparing
the company's
price highs/lows
against the
price where
the MACD signal
line crossed
is also a useful
technique to
see the stock's
own relative
price and to
determine whether
this cross is
more bullish
or bearish.
|
|
Setting
up the Screen
Overview:
In
this screen the predominant
screening criteria will
be the technicals. I will
also include some fundamentals
to reduce the results
list and to find companies
in my price range as well
as high volume.
Exchanges:
For
this screen I have only
selected to search the
main boards.
Technicals:
In
the technical criteria,
I have used the double
Bollinger Band signal
as well as a MACD crosses
through signal line. I
have used different time
frames for each technical
to get the series of signals
we are looking for. Specifically,
this is where the price
crosses the center line
in the Bollinger Band,
the MACD signal lines
cross (warning of trend
change) and the price
penetrates the outer Bollinger
Band (confirms trend).
Fundamentals:
The
fundamentals were chosen
to specify only a price
and volume range. This
helped reduce the list
of results as well as
ensuring high-volume stocks.
Results:
When
choosing which stock to
look at, pay attention
initially to the order
in which the signals occur.
We do not want both Bollinger
Band signals to occur
in the same day, since
this is most likely a
"pop." We are
looking for an uptrend
that has formed and has
been uptrending for at
least the last week or
so.
When
looking at the stock,
check to see if it is
near its relative low
or high as well as revenue
projections. The most
interesting stocks are
the ones near their low,
while the revenue projections
show increase. These would
be considered value stocks.
It is important to research
why they are at a low
and what are the future
prospects before making
any decision.
Adding
more fundamentals in the
screen will help to narrow
down the type of company
as well. It is possible
to add a condition that
also asks for a 52-week
low to have occurred within
the last month or earnings-per--share
conditions. I have not
added any of these conditions,
since they rely heavily
on the individual investor's
risk requirements.
