How did the MACD perform?
I thought it might be interesting to look at some of the commonly-used indicators and see how they have performed in this bull market. One of the most popular is the MACD, which we don’t use in ITM Bull strategy, but use in conjunction with SMAs in the ITM Bear strategy.
What is the MACD?
Briefly, the MACD is a combination of 3 exponential moving averages (EMAs):
- The MACD line: the difference between the 12 day and 26 day EMAs
- The Signal line: the 9 day EMA of the MACD line.
- The Histogram is a visual representation of the difference between the MACD line and the signal line.
The MACD chart
Th MACD is not rendered on the stock chart but in a separate chart below it. It looks like this:
Why parameters 12, 26 and 9?
The rather strange numbers (12, 26 and 9) are not, as is often suggested, chosen because they work best but because then Appel thought up the MACD back in the 1970s there was no online trading charts, and even professional traders relied on printed data and ticker tape. 26 was the number of trading days in a month, 12 because that is half a month, and 9 because that is the number of half days in a week. (Their math was a bit questionable. Worrying.)
Why do indicators work?
As with all indicators, they work because everyone uses them and acts on them! If you see a signal to buy or sell from an indicator, you can be sure that many others are seeing it also, and that they, like you, are going to act on it, hence it becomes a self-fulfilling prophecy.
If everyone sells on a sell signal guess what: the price will go down, which is ‘evidence’ that it worked. If everyone buys on a buy signal, then the price will go up – more ‘evidence’
So everyone jumps on the bandwagon!
How to use the MACD
Traders can use the MACD in several different ways but the most common is:
- A buy signal is generated when the MACD line crosses above the signal line.
- A sell signal is generated when the MACD line crosses below the signal line.
This is easiest to see by looking at the histogram: the buy signal is when it crosses the zero line and becomes green, and the sell signal when it becomes red.
(For a more in-depth discussion see chapter 4 of the ITM Bear book)
How good is the MACD?
Lets go back to the start of 2023 which was the end of the Biden Bear and the start of the current bull market. Here is a list of the signal days and buys made at open the day after the signal appears.
Not very impressive, is it? We know that Buy & Hold is the loser’s way of trading the market – if you have read my book Timing the Market then you know that the proof is there.
But here we have a strategy that dramatically underperforms Buy & Hold – and it is still taught and recommended! Here’s what Investopedia says:
Really?? And, of course, they always have this completely useless (in my opinion) advice:
‘You are most comfortable using’? What does that mean?
And the Motley Fools says:
The MACD can seriously damage your wealth
I admit to getting frustrated when I see all this ‘advice’ about indicators that people take seriously and act on.
It is no accident that 40% of day traders quit within the first month, and only 13% manage to last one year.
Frequent traders (i.e. those who trade regularly but not daily) also have dismal stats: 80% quit within the first 2 years.
Traders don’t quit if they are making money; the reason most quit is because they have lost some or all of their capital.
With ‘advice’ like that given above is it any wonder?
Hedge Funds aren't any better
We saw last week that although the market went up 24% in 2024, only 2 of the top twenty money managers managed to beat it, and then only by 2%.
Then, to add insult to injury, they only give clients half of what they made, so the average client made 6.5% last year.
Now we find out that the expert stock-pickers and technical analysts are relying on and recommending something that doesn’t work.
It’s enough to make you throw your hands up and walk away in disgust.
What To Do?
If you invest by yourself relying on financial advisers that tell you what stocks to buy, you’re bound for failure. And if you give it to the expert money managers, they will get substandard returns and only give you half of them!
I worked out a long time ago that the only person who was going to tell me the truth about the markets was myself, by relying on the data and charts which can’t lie. That’s why I have survived in the market so long, and have funded my very nice lifestyle without having to work or run a business.
To the markets
Last week was short due to MLK day and the Inauguration. The uptrend continues, with the S&P making a new high. Yeah!!
On Thursday it closed at $609.75, and dropped a little on Friday, which was to be expected as traders took fright at their good fortune and ‘locked in’ their profits before the weekend.
SPY Charts
The new high completes the bear trap. It was a nasty one, a 4.6% drop, and it had us worried when it dropped through the 585 level.
Since then, it has headed up nicely, but all the gaps between the candlesticks make me a bit nervous.
It would be perfectly normal behavior for SPY to go back and test the $600 level as that is such a significant number. If it holds as support, then that is a good sign.
On the long term chart, it has bounced off the lower bound of its trading range, which is good news.
SPYG Charts
SPYG also made new highs! The Darvas box I drew has now been well and truly broken, both on the upside and the downside. As for SPY, I am a little wary of the gaps up, especially the one on Wednesday. It may be wise to expect a bit of retesting of support. If SPYG stays above the gap (around $91) that will be a very bullish sign.
On the long term chart, we can see that SPYG is still in its trading channel, nearing the top bound.
QQQ Charts
QQQ has not made a new high, but is definitely looking more positive. Like the others, it had a big gap up on Wednesday, but isn’t looking quite as stretched. However, it may also make a retracement to check support levels.
Last week we noted that the last candle (17 Jan) was a large doji (a dragonfly doji, no less) which is commonly viewed as a trend reversal signal at the top of a bull run. I commented:
. . . but, in my experience, while you can get dojis at the top of a trend, you can also get them anywhere in the chart. In the last couple of weeks there have been dojis right in the middle of a trend which did not signal a change in direction (8 Jan, 30 Dec).
And so it proved. The next day (21 January) also had a doji – and then QQQ went on to move higher. So much for candlestick reading. It is interesting, a good way to describe the mood of the market, but not to be relied on for trading (in my observations).
On the long term chart we see that it has definitely bounced off the lower bound of the trading channel – a good sign that the trading channel is still intact.
VIX Chart (Volatility)
The VIX has settled down after its recent outburst. Comfortably below 20 (low volatility territory).
ITMeter
The week ahead
Last week, the Inauguration went smoothly, and the market rallied.
The headline news at the moment is that Colombia refused to allow two repatriation flights to land, and in retaliation Trump said he would impose a 25% tariff on all imports from Colombia, effective immediately and rising to 50% next week, plus a travel ban and revoked visas for Columbian govt officials. Ouch.
There is also the Fed meeting 28 – 29 January making investors cautious.
In the AI sphere, the good news about the Stargate initiative boosted confidence, now tempered by the news that China’s AI startup DeepSeek has a new model, R1, which is apparently comparable to U.S. models ( like ChatGPT) but significantly cheaper.
META, MSFT and TSLA release their quarterly earnings this week, which will give us an idea of performance over the tech sector.
The Futures
The futures have dropped like a stone, not good, but with 10 hours to market open anything could happen.
Five years after Covid
It strikes me that it is now 5 years since the start of Covid, and the ensuing bear market that was sudden and swift.
I have always based my long term charts with this as a starting date to give people an idea of context.
However, maybe it is getting too far away to be relevant – after all, we’ve had another bear since then. Any thoughts?
My Internet Problems
Most readers know that I live in Australia. We have a govt “National Broadband Network’ (NBN which ‘supports the nation’ with access to the Internet.
Well, it has now been down for more than 48 hours – not update (apart from the original one saying ‘its down’), no explanation, now prediction of when it is going to be back up. I pay $109 per month for this service – NBN it is NOT GOOD ENOUGH. ‘Australia relies on us’ – how misguided is that???
Which is by way of explaining that I am doing this through my cellphone hotspot, which is also not terrible effective, so apologies for any deficiencies. Honestly, the government couldn’t organize a p%&s up in a brewery! (It’s an uncouth Aussie expression)
Fingers crossed for a good week!
Heather
Q & A
If you have a question that you would like to ask me then please do it below. If you want to chat to other traders please go to ITMChat.
(I know I am a little behind – I will copy the questions from last week that I haven’t already answered to this week and answer them below)
4 Responses
I use MACD, but not with the typical settings. Why do what others do or you will perform like others who do not perform that well? I am a Trader and sometimes a very short term Trader. I find my settings do help on shorter term trades, but you must remember it is just an indicator using Moving Averages, no more and moving averages do have drawbacks but often one finds they are the best indicators you can use. Does this make sense?
Hello again Ms. Heather.
I’m chuckling.
“…the government couldn’t organize a p%&s up in a brewery!”
Funny.
Up until very recently, a somewhat similar saying we use here in Indiana applied to our government.
“They couldn’t pour p[ss out of a boot with directions on the heel.”
Our new guy has already been great for the United States of America.
In the end, I think he will be great for the world.
Cheers,
John
Dear Heather,
You are such a professional and even though the Australian Internet is down, you still provide us the weekly blogs with timeliness and courtesy. I am forever grateful and thankful. By the way, the birthday of the Internet is January 1, 1983. Happy birthday to the Internet. Live well and be kind.
Sincerely,
George Henry
With so much on my plate … i look forward to see what you’ve written about the market. The stock i was interested in… is making a new high. Netflix. I used to go into Blockbuster to watch the latest Dvd. I had heard that the owner of Netflix had gone to Blockbuster and asked for 50 million to buy out… Blockbuster refused. Is there any Blockbuster stores anymore…
R