Não declarar trabalho doméstico vai deixar de ser crime

[rsacramento]

a propósito do elder, não resisto a deixar aqui o psi 20 à la elder:

[Jesse James]

February 05, 2009

Dr. Alexander Elder


Divergences at Market Bottoms


I am writing to you after returning from our Traders' Camp in the Dominican Republic. We always run a Caribbean Camp in January, starting on the MLK weekend - and we have already reserved our favorite resort for next year s gathering in January 2010.

Running a Camp this year, during a bear market, felt a little different than previous years. The group was slightly smaller, and it was extremely serious. Sure, we had our share of fun, with morning walks on the beach and nice dinners at night, followed by drinks at a local bar, but this was one of the most focused and work-oriented groups in memory. As usual, the group was very diverse, with traders coming in from 9 countries, but this time we had very few women traders, which, in our experience, is typical of bear market bottoms.


One of my key themes in this Camp was the need to overcome the 'short memory' problem that plagues traders. Most market participants feel that what has been happening in recent weeks will continue to happen in the future. This approach works well during market trends but it becomes deadly at turning points. The majority of traders and advisors turn overwhelmingly bullish at market tops, and the decline hits them hard. They become severely bearish at market bottoms - and miss the best buying opportunities.

How can we escape this self-defeating pattern?

Good intentions aren't enough - we need tools and systems to identify turning points. We need to develop a feeling of trust in these tools, so that we have the confidence to act when they flash their signals.

Today, I want to show you one of my favorite tools for identifying important turning points - a divergence between MACD-Histogram and price on weekly charts. Review the signals shown here, and you can follow up by viewing even more examples in our Video Vault, described below.

Keep in mind that only practice will create a feeling of confidence in your mind. You must keep examining your own charts, marking up their signals and documenting results until you trust what you see and are ready to act.


CATCHING THE MARKET BOTTOM - THE A-B-C STOCK PATTERN

Let us pick a stock, examine its behavior at the 2003 bear market bottom, and then fast-forward to today. Let's take a look at MOS, and note that this pattern shows up today in dozens, if not hundreds, of stocks.





Weekly Chart 1 shows a steady downtrend, with lower lows and lower highs. Prices break to a new low at point A, then rally to the moving averages at point B, with MACD-Histogram crossing above its zero line. This crossing should alert us that the bear trend may be ending and we should put this stock on our watchlist. If it declines again, its behavior near the low A may provide very useful clues.



As we see in Chart 2, a few weeks later MOS does decline. For over a month it hovers above the low A but then breaks below that level. MACD-Histogram confirms that break by falling below its zero line. Then, instead of accelerating to the downside, MOS picks up and closes above its support line (drawn across the low A). At the same time, MACD-Histogram ticks up, completing a bullish divergence A-C - a lower second low in price with a higher second bottom in the indicator, which briefly crossed above zero between the two bottoms.



In Chart 3 we see that prices are racing higher: trend-followers keep jumping onboard as the stock rallies from its bear market bottom. We can see another attractive bullish signal one week after point C: Force Index (in the bottom pane of the chart) has crossed above its zero line. Long-term weekly Force Index is very good at identifying broad phases in the stock market. It tends to stay below zero during bearish phases and above zero when the market is bullish. When two independent indicators give the same messages, they confirm one another.

Let us once again review the A-B-C pattern:
* At point A the downtrend is confirmed; no action recommended
* At point B, the crossing of weekly MACD-Histogram warns us that the back of the bear is being broken; watch the next decline for a potential bullish divergence
* At point C prices fall to a new low but MACD-Histogram makes a more shallow low; when its slope ticks up, it gives a strong buy signal.

Let us now fast forward and take a look at the current position of MOS.



Weekly chart 4 shows that a severe drop in October-November 2008 created a low A. The stock stabilized and rallied to its EMA in area B, with MACD-Histogram rising above zero. Ask yourself - what will happen if another decline drags the market below its October low? What if this stock declines below its level A? The crowd will be terrified, but a savvy trader will keep his or her eyes on the behavior of weekly MACD-Histogram. If it falls below zero but flattens out and then ticks up, it will create a bullish divergence and provide a fantastic buy signal. That signal would come amidst public gloom and doom, which is the best time to buy, making sure to place a fairly tight stop below the latest low.

Let me remind you that one cannot trade using a single indicator. Further, it is absolutely essential to use proper money management. These and many other rules are described in my books. The point I want to bring to your attention today is that there are repetitive patterns in the stock markets. They generate strong signals, and we can find ways of trading them. You can see these patterns in a multitude of stocks today.

When I discussed this signal at the Camp, I also pointed out to the traders that in addition to the ideal pattern shown above, several minor variations may occur. What if price low C does not take out A? What if the decline C of MACD-Histogram does not go below zero? We should have a plan that covers these eventualities.


Best wishes from all of us to you.