Tuesday, April 16, 2013

Technical Tuesdays: Weekly MACD

So, yesterday markets produced quite the taxing experience for investors for a variety of offered reasons by the "cause and effect" financial media. Is there any meaningful significance to yesterday's swoon? From a technical analysis perspective, not much and here are the reasons why.

As noted in last week's Technical Tuesday's post, the Mega Trend for US equities is solidly in bull mode (see post below). What we can add to this discussion is another useful momentum indicator, the weekly MACD*. As the accompanying charts illustrate (click images to enlarge), the weekly MACD works beautifully in tandem with the Mega Trend as an (a) early trend change indicator and (b) as a confirming indicator.

As an early trend change indicator, I refer you to the period in the summer of 2007 and the winter into early spring of 2008/09. Here you see the weekly MACD NOT confirming the established trend at the time (bullish in the first case, bearish in the second). This is an indication that the power of the established trend is faltering.

As a trend confirming indicator, throughout the bear market of 2007-09 the weekly MACD was firmly in a confirming downtrend. The counter move within that bear trend took place within the established bear Mega Trend call of December 2007 and was little more than a bounce within an established trend. On the flip side, the bull market that began in the spring of 2009 (and was confirmed by the Mega Trend later that spring**) experienced the usual weekly MACD counter trend moves with ONE EXCEPTION: the summer into early fall of 2011, which, you may recall, required the latest intervention by the US Fed to stem what was emerging as an economic and market reflecting reversal.

Investment Strategy Implications

Market tops tend to be rolling affairs where complacency is reflected in the dismissive manner more fundamentally oriented investors buy the idea that economists and equity analysts possess a near flawless capability of predicting the future during uncertain times. Market bottoms, on the other hand, tend to be panicky affairs where fear produces plunging markets that become overbought and overwrought. History is pretty clear on this. And the predictive value of such history is whole lot better than dreamy eyed fundamentally oriented optimists proclaiming "Nirvana Forever!" and the counterpart, the doomsday preppers.

Conclusion: At present, the data supports the bull case from both a Mega Trend and weekly MACD perspective.

*Investopedia defines MACD as "A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals."

To learn about MACD, click here and click here.

**Reminder: As noted, market bottoms are different animals, which produce a delayed Mega Trend signal.

About Technical Tuesdays

Technical Tuesdays illustrates selected elements of market intelligence analysis. It - along with fundamental and thematic analyses - is an integral part of an overall macro strategy analytical approach employed by Blue Marble Research Advisory.

To learn about Blue Marble Research Advisory services and its integrated and macro/holistic approach to investment strategy, click here!

No comments: