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MACD


Yahoo! Surges Off Key Retracement

01/05/07 09:07:00 AM
by Arthur Hill

After a six-week decline, Yahoo! firmed in a key retracement zone and then surged. This is bullish and points to higher prices.

Security:   YHOO
Position:   Accumulate

Yahoo! surged over 20% from late October to late November 2006. This is a strong move and the stock was entitled to either a correction or a consolidation. Yahoo! corrected with a decline back to around 25.5 and then firmed in late December. The area around 25.5 represents a 50–62% retracement of the October–November surge, which is typical for a correction. The 50% level stems from the principles of Dow theory, while 62% represents a Fibonacci number (0.618). The stock firmed in this zone and then surged above the 20-day moving average with a long white candlestick. I find this bullish and expect higher prices.

Momentum is also turning up but has yet to turn positive. The indicator at the bottom of Figure 1 is the 5-20 moving average convergence/divergence (MACD) (red line). It is determined by subtracting the 20-day moving average from the five-day moving average. The red line is positive when the five-day is greater than the 20-day and negative when the five-day is less than the 20-day. The 5-20 MACD turned up during the last few days, and this tells me that the five-day is getting closer to the 20-day. In fact, the indicator moved above its signal line (white line), which confirms the recent surge in the stock.

FIGURE 1: YAHOO! The stock firmed in the 50–62% retracement of the October–November surge.
Graphic provided by: Telechart 2007.
 
The price chart shows the five-day moving average (red) and 20-day moving average (white). The five-day is the faster moving average, and it is still below the 20-day moving average; hence, 5-20 MACD remains in negative territory. The five-day crossed below the 20-day in early December and has remained below the last five weeks. I am looking for the five-day to cross back above the 20-day to further affirm this bullish signal.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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E-mail address: arthurh@tdtrader.com

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Date: 01/05/07Rank: 5Comment: 
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