In Praise of Boring Old McDonald's

One of the accepted rules of trading states that "the trend is your friend". A good method for catching a trend is to buy a stock when its long-term 26-week EMA is sloping upwards and there is a concurrent pullback to its 22-day EMA. A beautiful example of a currently trending stock is McDonald's. I've posted its chart below.

Even as the broader market has been crushed in the past month, McDonald's has kept chugging along. Repeatedly pocketing a few bucks buying the dips to the 22EMA and selling at the top of the trading channel isn't as sexy as trading a high-flyer, but it's been easy to trade and ultimately that's what keeps the bread (and Big Macs) on the table.

All charts courtesy of http://stockcharts.com

First, the weekly:

Then the daily:

Why Weekly Charts Matter

In the age of short attention spans and instant trading gratification, the poor, neglected weekly chart still provides you with ample clues towards key price levels and big shifts in momentum. Even if you trade short-term only, you need to be cognizant of the weekly. Check it faithfully.

To illustrate this point, I made some S&P chart notes of what the weekly can show you. It is rather eye-opening, is it not?

All charts courtesy of http://stockcharts.com

Example of a Trading Checklist

All good traders keep a log. In order to evaluate your trades, both winners and losers, you need to know what you were thinking at the time. I use my log as both a checklist to consult before entering trades and as a post-trade evaluation tool. Since I'm a bit of a Luddite, I use paper and pencil normally. But for those of you who prefer Excel, I made this little spreadsheet that contains the same information. Feel free to use it or improve it!

Technical Analysis Tools - MACD, Part I

MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD) - INTRODUCTION

For this series of posts, I will be discussing some of the most commonly used technical analysis tools in the swing trading community. There are an endless number of technical indicators on most technical analysis and trading websites and it can be mighty daunting to sort through them when you are getting your feet wet. So to start, I will focus on what I find most useful and later in the series I will delve into the more arcane ones.

When I first started trading, I was of the mind that the more indicators you use, the better. I could not have been further from the truth! Using too many indicators leads to confusion, frustration and a trip to the drugstore for some extra-strength Tylenol. Worst of all it can lead to trading paralysis along the lines of: "this indicator says to buy, this one says to sell, and the other ten say to do nothing! What should I do????" So my sage words of advice that I will pound into you (and myself) again and again is "Keep It Simple, Stupid". Find the three or four most trustworthy indicators you find after experimentation on a simulator and through backtesting and master them. You should choose ones that you find easy to understand and that will help you avoid Trader's Block. Using this approach will give you clarity, calmness and quiet confidence, all of which are totally necessary to being a successful trader.

As I write this series of posts, I will spare you the underlying mathematical equations in these indicators. Most successful traders do not know anything beyond the nuts-and-bolts nor do they need to. A good driver doesn't need to be a mechanic to steer his vehicle the right way. The basics work just fine.

Without further ado, I will start off with the Moving Average Convergence/Divergence, better known by its initials of MACD. The MACD consists of two plot lines on a stock chart that paints a picture of where stocks have been in both the short and long term. Since past is prologue in the stock market, I find it to be one of if not the most useful of tools when interpreted properly. The same way a meteorologist will track an existing hurricane by studying the pathways and tendencies of hurricanes throughout history in the hope they can predict its path, a studious trader will pore through his/her charts and look at how it has performed in the past to glean the stock's next big move. The MACD greatly aids in this endeavor. It helps a trader by indicating the strength of a given trend.

My next post will be a synopsis of the MACD and how it works. The third part will be the one you care about...how to trade it properly.

Sometimes Flat is the Best Position

With today's 3.2% up day on the S&P,  my warning yesterday for profitable shorts to unwind their positions proved prescient. We bounced from oversold levels and the bullish Histogram divergence and Graveyard Doji proved too much and the bears threw in the towel, at least for a day.

My indicators have not yet turned to "Enter Long" from "Exit Short" so I still have no comfortable entry for either a long or short trade. Wednesday should tell us more. I will be watching to see if we break the falling wedge we are in or if we work to a lower low with a more classic bottom and more pronounced divergences. This latter scenario would actually strengthen my belief that a rally back to the Head and Shoulders neckline will be coming in the next month or so.

It's important to note that if one goes counter-trend in a volatile environment, it can only be done following strict rules. I only do so when there are clear divergences on the MACD, as it is the strongest technical indicator around. Even then, I trade just a very small portion of my account. Fewer shares with a wider stop if the reward outweighs the risk. Trying to catch a bottom is perilous and has destroyed better traders than myself. Discipline is all that keeps us in this game for the long haul, doubly so in when going against the primary trend. Until then, I'm sitting tight and flat until the market tells me which way to trade instead of listening to my own biases.

Good night all! Will update more tomorrow.

A Day for Closing Short Positions

If you've been short recently, and I certainly hope you've been, today may have been a good day to unwind and take profits. I closed the last of my short positions late in the day when it became apparent that a Graveyard Doji was forming on the S&P 500.

For those new to Japanese Candlestick analysis, a Graveyard Doji is formed on a day where the price opens AND closes at or near the low of the day with a big intraday move higher. In a downtrend this is deemed a possible bullish reversal. It does require a confirmation the next day and in and of itself is not always worthy of using as the basis of a trade.

However, there were other factors that led me to close out all my shorts. Pull up a daily chart of the S&P and you can see a potential higher low might be carving itself out on the MACD Histogram while the S&P might be heading to a lower low. Such a Histogram divergence will often presage a major reversal and would be very bullish in the near term. These are good signals for profitable shorts to be prudent and lock in profits before the "pucker factor" gets too high.

My thesis is the market will make a lower low in the next two weeks (with divergences as we are highly, highly oversold) to complete this leg down with a subsequent rally to retest the neckline of the Head and Shoulders pattern. After that rally is complete we should return to the primary downtrend.

Although I believe a short-term reversal to be imminent, there's no way on God's green Earth I'm going long until I see a LOT more confirmation. And even then, it would be a small, tight trade since it would be against the primary trend. Trade safely always. Talk to you all again soon!