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Trending versus Consolidating Markets



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Lionel,

Thanks for your comments. Let me expand a bit about the MACD. First, I 
often use the terms MACD and Price Oscillator (	PO) interchangeably at 
times although this isn't strictly correct. I usually use the 12-26 
percentage-basis PO instead of the standard MACD. I suspect that comparing 
POs of securities on a percentage basis would tell something about a 
security's volatility. However, I haven't yet done a study to see if this 
is true.

No indicator is perfect, and that sure includes the MACD (PO). The problems 
begin when the indicator goes from trending to consolidating, as indicated 
by the MACD going from zone 1 to 2 or from zone 3 to 4. At least three 
things can happen after this crossover: 1) the price can quickly change 
directions and begin trending in the opposite direction, 2) it can continue 
to trend in the same direction at a rather steady rate, or 3) it can 
stagnate into a trading range. In the first case a significant move can 
occur before the MACD crosses the zero line that indicated a new trend has 
begun in the opposite direction. In this case, buying when the MACD crosses 
above its moving average and selling short when it goes below the moving 
average is a better strategy than waiting for MACD to cross the zero line 
that indicates a new trend. The problem with this approach is that you 
don't know for sure that the price is trending until the price has moved a 
significant distance. I haven't found a way to resolve this difficulty. ADX 
also has this lag problem.

In case 2), if the trend is growing at a relatively constant rate, the MACD 
will whipsaw across the trigger line, giving lots of false signals.  This 
can often be avoided by looking at the price and several moving averages. 
If this is case 2), the price will not cross moving averages (such as the 
20-day MA) but will move parallel to them.

In case 3), the price will settle into a narrow range and the moving 
averages will converge to the price. The MACD will hover near the zero 
line. In this case it is best to be out of the market.

I have a lot of trouble with this transition, so I usually watch to see if 
the price is crossing the moving averages, and if so, I get out. This isn't 
very satisfactory to me, but I haven't come up with anything better.

As an aside, I find that the 3-10 PO is fairly good for short-term signals. 
Go long when the 3-10 PO is greater than zero and crosses above its 3-day 
MA. Sell short when it is less than zero and crosses below its 3-day MA. 
Also, if you plot the 16-day (give or take a couple of days) MA of the 3-10 
PO, that MA looks a lot like the 12-26 PO.

Any comments you or others have about all this are most welcome!

Best wishes,

Tom







At 05:49 PM 2/3/2001 -0600, you wrote:
Tom:
Your ideas are interesting. I use a price oscillator instead of  MACD as I
can easily preset my own parameters.  With your Zone definitions and ADX, I
don't think that VHF adds much new information.

MACD is a fairly good indicator. With a stock like AAPL, which has had a
catastrophic collapse in price, it doesn't work well.
 > Lionel Issen
 > lissen@xxxxxxxxxxxxxx
 > ----- Original Message -----