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Using Technical Analysis to Manage a REIT Portfolio Part III -- MACD

02/14/01 10:26:51 AM
by Dr. Michael J. Seiler

Will the MACD indicator improve results? So far the RSI oscillator and the Parabolic trading systems have been flawed.

Security:   N/A
Position:   N/A

Moving Average Crossover Divergence (MACD) is a lagging indicator, meaning that it identifies a trend or trend reversal after they have begun. It works equally well in trending or non-trending markets. MACD consists of three exponentially smoothed moving averages: fast (12 days), slow (26 days), and a trigger or signal indicator (9 days). The formula is as follows:

MAt = the moving average value for the current period,
MAt-1 = the moving average value for the previous period,
n = the number of periods considered in the moving average.

After plugging in the three different values of "n" (9, 12 and 26), three resulting moving averages are calculated. When the difference between the slow and fast moving average crosses the trigger or signal indicator from the bottom, a buy signal is generated. When the difference between the slow and fast moving average crosses the trigger from the top, a sell signal is generated.

The EasyLanguage code for MACD is provided at the end of Part III.

All data are end-of-day, provided by Bonneville Market Information.

The overall results for Equity REITs are similar to those of the RSI Oscillator. Although the average gains and losses are not as large as the RSI Oscillator, the net gains remain at roughly the same level. Moreover, the MACD system is profitable the majority of the time in seven of the eight Equity REIT property types and six of the nine sub-property types.

Unlike the results from RSI and Parabolic, Mortgage REITs were traded for a profit even though the sub-property type, Diversified, results were still negative. For the Hybrid REITs, the MACD trading system did not generate a profit even though the results were much improved over the two other strategies.

The RSI oscillator and MACD systems generated a sufficient profit when applied to equity REITs. The third, parabolic, was unsuccessful. When the three strategies were applied to mortgage REITs, only MACD was successful and even these results were not convincing for all property types. Finally, all three technical analysis techniques were unable to generate a profit for hybrid REITs. This was also the case at the sub-property level.

In sum, technical analysis based trading systems can be used to profitably trade a portfolio of equity REITs. However, although I demonstrated the effectiveness of two strategies, there are an infinite combination of trading techniques and system inputs that can be tested. Therefore, while I have shown that technical analysis can be used to trade REITs, I do not presume to have identified the most effective trading system possible.

MACD Code Construction with EasyLanguage

I. Function

Inputs: Price(NumericSeries), FastMA(NumericSimple), SlowMA(NumericSimple);
MACD = XAverage(Price, FastMA) - XAverage(Price, SlowMA);

II. Indicator

Inputs: FastMA(12), SlowMA(26), MacdMA(9);

Plot1(MACD(Close, FastMA, SlowMA), "MACD");
Plot2(XAverage(MACD(Close, FastMA, SlowMA), MacdMA), "MACDAvg");
Plot3(Plot1 - Plot2, "MADiff");

{Alert Criteria}
If Plot3 Crosses Over 0 Then
    Alert("MACD has generated a bullish alert")

    If Plot3 crosses under 0 Then
      Alert("MACD has generated a bearish alert");

III. Bullish Signal

If CurrentBar > 2 AND MACD(Close, FastMovAvg, SlowMovAvg) Crosses Above
XAverage(MACD(Close, FastMovAvg, SlowMovAvg), MACDMovAvg)[1] Then
    Buy ("MACD") This Bar on Close;

IV. Bearish Signal

If CurrentBar > 2 AND MACD(Close, FastMovAvg, SlowMovAvg) Crosses Below
XAverage(MACD(Close, FastMovAvg, SlowMovAvg), MACDMovAvg)[1] Then
    Sell ("MACD") This Bar on Close;

Part I - The RSI Oscillator

Part II - The Parabolic

Dr. Michael J. Seiler

Title: Professor of Finance
Company: Hawaii Pacific University
Address: 1132 Bishop Street; Suite 504
Honolulu, HI 96813
Phone # for sales: 808-544-0827
Fax: 808-544-0835
E-mail address:

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Date: 02/15/01Rank: 4Comment: 
Date: 02/20/01Rank: 5Comment: I like the professional-like format of all three articles by the author. More of the same or similar please.

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