In the beginning, its very awkward to grow out your hair.  Likewise, with a stock or other investment, a new position can feel awkward.   We check it often, and sometimes find its not looking as we want — maybe going entirely the wrong way.    After awhile, if neither the stock nor the hair has disintegrated, we can get comfortable.

In the middle phase, to grow a long braid, one has to do nothing.    Sounds easy but funny it doesn’t come very naturally for most of us!  With hair, everyone from friends to stylists - and stylists are the worst! - suggests a shorter cut or wonders aloud about the upkeep.   

Likewise, in the middle phase of growing a big investment position, if its moving the right way, you have to sit on your hands and skip many opportunities to sell.   Neither hair nor position can grow to its full potential if you keep messing with it.

Nothing grows forever.  We have to remain alert for a change of character and eventually make the hard decisions.   My blonde hair darkened.  Okay, I could deal with that.  Faced with gray wisps coming in, I had a choice:  Hang on and watch the gold slowly whittled away or lop the braid while it was still useful (undyed hair is made into wigs for kids on chemo.  see before and after pics of my “harvest”.)

Similarly, a change in character of the markets begs a decision whether to let the downdrafts slowly erode positions, or get out while the getting is still good.

Lesson 5 encourages focus.

Lesson 6 is my favorite. Click here to follow up with more information on how to get this step done right!

Lesson 7 is a simple technique to keep the “odds in your favor”.

Lesson 8 is arguably the most necessary ingredient to good trading.

Previously posted Market Minute lessons and commentary:

Lesson 4: Psyched up for the big trade? Don’t be!

Lesson 3: How About Doing What Works?

Lesson 2: What Time is Good for You?

Lesson 1: One Minute Towards Successful Trading

(BackTesting Blog is an INO.com affiliate)

All three shorts are sporting open profits.   Being 3 for 3 is much better than the odds suggested by backtesting MACD/H negative divergences.   Having just recorded a video about shorting on MACD divergences for The Truth About MACD series, I’m very much aware that its too early to declare victory on these trades.

I did try to increase the odds by only shorting a negative MACD divergence when I saw other compelling evidence of a market drop.    Continuing to monitor the markets makes sense and here are more elements of my bearish case to add to those from last week:

• Market indices continued down
• Nasdaq broke a key trendline - click here for affiliate Adam Hewison’s analysis
• Market leader AAPL dropped hard after its product announcement (watch a Hewison video on AAPL).  Since AAPL led the way up, I wonder if it will lead the way down.
• Breadth (A/D line) dropped below its 50-day MA

Selling short at this point may be too aggressive and I’m not recommending it for everyone, or to anyone for that matter.  Even if you don’t want to go short, you might want to glance at the Signals pages to see if any stocks you already own are on the lists and consider carefully whether you want to own anything with negative divergences at this time.

Signals

• MACD Divs Daily
• MACD Divs Weekly
• MACDH Divs Daily
• MACDH Divs Weekly

My charts are plotted as candlesticks because they highlight detailed movements around the open and close.   Candlesticks also present recurring patterns which aim to portend the price action and which I haven’t (yet) backtested.    However, since candlesticks are on the charts in my BackTesting Reports, videos, and software, I want to give everyone an opportunity to how they are interpreted by experts.

If you’re interested in learning more about candlesticks, check out this complimentary video from my affiliate partner INO.com:  Click Here to Watch Now

The video is titled “Advanced Applications of Candlestick Charting”.  When you watch, authors, software programmers, and co-founders of the International Pacific Trading Company, Gary Wagner & Brad Matheny will walk you through:

-History of candlestick charting

-How to interpret candlesticks

-How to merge techniques of Eastern & Western technical analysis together

-How to merge candlestick techniques with your current trading plan

-And more…

You’ll watch and listen as Wagner explains the importance of using this strategy. He says, in part, “Candlestick patterns are a mathematical formula which illustrate the psychological market sentiment. In other words, as a market reverses, or a market is moving in an up-trend, there are certain traits that can be distilled in terms of mathematical formulas that will reveal some very important information.”

This 100 minute complimentary video can be found on Trend TV. You don’t have to worry about watching the whole video at once. After you have a password, you can revisit anytime to watch the rest of a video, review a video, or watch other videos on Trend TV.

Click Here to Watch Now

• to illustrate how I use the MACD divergence signals
• because it looks like something interesting may be afoot

Step 1 - Form an overall opinion of the market direction

I use several indicators, factors, and experts to form my overall opinion of the markets.   Some methods I’ve back tested, others await testing.  For today, I’ll cite the following:

• McClellan Summation Index Negative Divergence
• SPY down hard and closing at its lows, after exhibiting repeated negative MACD divergences
• Weekly Trade Triangle Sell Signal — check out this video by Adam Hewison for a very articulate rundown

I come away with a bearish outlook for US stocks.

Step 2 - Check the Weekly MACD Divergences, then Daily MACD Divergences

Since my outlook is bearish, I will be looking more at the negative MACD Divergence signals.   I have yet to publish the back test results for shorting MACD Divergences but let me just say that I know to be VERY cautious with these signals on the short side.     If I owned any stocks on the negative divergence lists, however, I would sell them in a heartbeat, given my outlook from Step 1.

If my outlook were more bullish, I would examine the positive divergence signals for possible buy candidates.  But it isn’t, so I don’t.

Always check the larger timeframe first so that means looking at weekly charts before daily charts.  Whether you choose to review MACD Histogram divergences or MACD Lines divergences or both will depend on your goals and temperment.

I check in this order:

1. Weekly MACD Divergences
2. Weekly MACD Histogram Divergences
3. Daily MACD Divergences
4. Daily MACD Histogram Divergences

As of Friday’s close, two stocks appear as negative MACD divergences on all four lists: BIDU and SBUX

Step 3 - Gather more info about the candidate stocks

I check the charts of my two favorites from the lists.  Both charts look like reasonable negative MACD Divergences.   I also take a brief glimpse at selected Key Statistics.   BIDU is showing moderate but not overwhelming growth.   SBUX sports 4-figure earnings growth which I take to mean they have recovered a bit from the abyss.   Still MCD is making strong competition.

I also check my affiliate INO.com’s trade triangle trend analysis.  Again, I haven’t yet published my back test results but let me briefly say that my interest is to emphasize the Weekly Trade Triangle.   I don’t take all the signals but won’t trade against them, that’s for sure!

As it happens, SBUX  just got a weekly triangle buy signal so that scratches it from my list for now but I add it to my portfolio to watch.   BIDU is listed as “sideways mode” so that remains a viable candidate for a high-risk short sale.

Along the way, I noticed a fresh weekly triangle sell signal on AAPL.  That catches my eye because AAPL showed up on the weekly negative divergence list and my friends were talking about its upcoming product announcement Wednesday.   I also add AAPL to my watch list for consideration late in the week.

(if you want your own Trend Analysis, just click the symbol and enter your email address)

Step 4 - Apply Risk Management

The final step in assessing trading opportunities is applying judgement to reduce risk.  

I first consider what I know of my best current candidate from the steps above, BIDU:  its a crowd favorite that’s defied gravity before.  That’s not to say it hasn’t been knocked down, it just that as it hit a New High earlier in the week, I know it will come to the attention of lots of momentum traders.    

I decide to short BIDU, but select a risk amount on the small end of my scale.

I consider where to put my stop loss and realize due to the high price per share, it will be over $50 per share away from my likely entry point.  That means to keep my risk low, I will be trading very few shares indeed.   So be it.

I enter the order to sell short, along with an automatic stop loss and wait to see what next week will bring.

In summary, this is an example of my process of stock market analysis which highlights how the MACD Divergence signals can be used in the context of a broader market analysis.    I hope you can learn from this example and apply these tools to help your own trading.

In keeping with our mission as an educational resource, these MACD divergence signals are posted to show you an easy way to find examples for further study.   Before trading, we strongly enourage you to assess the track record for divergences — it is not perfect — by reading either the reports or videos in the Truth About MACD Series.

The divergences sought and presented by the scanners are:  

• MACD Divergences using the MACD line or Appel’s Histogram
• MACD Histogram Divergences using the common MACDH 

The scheduled update times are:

Weekly MACD and MACDH Divergences: once a week, calculated on each Friday close and posted no later than Monday evening

Daily MACD and MACDH Divergences: twice a week:

• calculated on each Friday close and posted no later than Monday evening
• calculated on each Wednesday close and posted no later than Thursday evening

Trend Analysis is provided on each stock symbol by affiliate partner INO.com, giving you complimentary technical analysis briefings using entirely different criteria.   Trend Analysis uses trend following techniques while MACD Divergences are a reversal technique.    You can consider both for a more balanced view of each market.   To get the Trend Analysis, click the symbol on the Signals page list - it costs you nothing and and no payment info will ever be requested.

Check out the Signals pages today:

• MACD Divs Daily
• MACD Divs Weekly
• MACDH Divs Daily
• MACDH Divs Weekly

Adam Hewison’s  Minute 3 video (click here to watch) suggests traders choose between technical and fundamental information for their trading decisions.

I have to ask:  How about using what works?

We have the technology now to check out how well each of the different types of data performed in the past.  You can look at the track record of experts writing newsletters, back test technical indicators, back test fundamental numbers like Earnings Per Share (EPS), Price/Earnings, and most of the key statistics of a company.   Services tell how well seasonal predictions correlated with actuals, and even programs to data-mine for dates a market “always” moves.

With all that at our fingertips, we’re in a great position to estimate the quality of data source, and cherry-pick the data sources that demonstrated their effectiveness — or at least avoid the ones that are complete hooey.

However, our human brains are wired for stories.   Both fundamental analysists and technical analysists can weave compelling stories.  Unfortunately, at times the juiciest stories are not based on the strongest data.

Perhaps the key question is:  Do you want to make your decisions based on objective data with a known track record, or do you want to remain a sucker for a good story?  Adam Hewison is right in that you need to decide what type of information you will use to trade.

One way to facilitate that decision is to list the types of traders and their time frames:

• Buy and Hold Investor - forever
• Active Investor - longer term of a year or more but has a plan to sell eventually
• Position Trader - catch one leg of a trend, hold trades for weeks or months
• Swing Trader - get in for a quick pop and out within days
• Day Trader - doesn’t hold overnight
• Market Maker - constantly offers a bid and ask price

Understanding yourself is essential.    Understanding the different risks and rewards of trading in each of these timeframes gives you a framework to find the optimal spot for you.  A good place to find out more is the BackTesting Report Baseline - click here to download it directly (no registration required).

(BackTesting Blog is an INO.com affiliate.)

Click here to watch the first one directly

The key word in the video is clearly “Confidence”

What do you need to do to gain the confidence you need to trade successfully?  Your answer might include items like these:

• Build knowledge of markets, charts, and indicators
• Follow strategies of experts such as Adam Hewison
• Back test strategies and indicators
• Trade small and then scale up once successful
• All of the above

Your answer is unique to you but whatever it is, I encourage you to take time early in the year to plan for your success throughout 2010 and beyond!

(BackTesting Blog is an INO.com affiliate)