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MACD


Short Gold

05/05/08 09:19:58 AM
by Alan R. Northam

The moving average convergence/divergence (MACD) indicator has recently risen to its zero line and is now turning back down, setting up an ideal short-selling position for gold.

Security:   AU
Position:   Sell

Figure 1 shows the daily price chart for Anglogold Ashanti (AU) over the last one year. This chart shows that the 50-day moving average has crossed under its 200-day moving average, known as a "dead cross," and signifies that AU has entered into a long-term bear market. I have also shown market resistance at 38, as indicated by a red horizontal line drawn off the April price peak. I have further shown support as indicated by the thick green horizontal line drawn off the August 2007 low and the February 2008 low. Below this price chart, I have shown the moving average convergence/divergence (MACD).

FIGURE 1: AU, DAILY. This price chart of Anglogold Ashanti shows a 50-ay and 200-day moving average along with support and resistance levels. The MACD is also shown below the price chart.
Graphic provided by: StockCharts.com.
 
The MACD measures the momentum of the trend of a stock or market by comparing the difference between two moving averages. I prefer to use the 13-day moving average and the 34-day moving average for this analysis. When these two moving averages pull away from each other, or diverge, the momentum of the stock being measured is said to be accelerating, and the MACD (black line) moves upward if the 13-day moving average is above the 34-day moving average or downward if the 13-day moving average is below the 34-day moving average. When the two moving averages are drawn toward each other, or converging, momemtum is said to be decelerating and the MACD line starts to slow down and could even change direction. The red line is known as the signal line and is a nine-day moving average of the MACD (black line).


From mid-January to mid-February, we note that the MACD line and its signal line had been moving in a downward direction, indicating that the downward trend on the price chart that started in early January was accelerating. In mid-February, however, we also note that the MACD line and its signal line both turned upward, indicating that the downward price trend was slowing down. In mid-April we further see that once again the MACD line and its signal line are starting to turn back downward. This is an indication that the downward momentum of the price trend could be on the verge of starting to accelerate once again. Both the MACD line and its signal line have now crossed back to below zero and offer an excellent point at which to sell AU short. However, note on the price chart that AU is now up against the support zone. Therefore, I would add in a filter and wait for AU to close below this support zone before initiating a short position. Once a short position has been initiated, I would stay in the position as long as MACD continued to move lower. Should MACD turn back upward, however, and both it and its signal line has crossed back above its zero line, I would close out my short position for a small loss. Initially, I would set a target price of $29, which is the next support level drawn off the 2004 price low. From the current price of $33, that give a profit potential of 10–14% over the next couple of months. I would also set a stop-loss of 2%. I never allow my losses to run more than 2% before I get out of a losing position. This gives us a very nice risk-to-reward ratio of 5:1.

Not all trade setups work, and along with the potential to profit from trade setups comes the risk of loss. Successful traders accept these losses, knowing that over the long term there is a high probability that more trade setups will be profitable than those that produce losses. Consistency in trading is the key to successful trading.

This trade setup is given for educational purposes only and is not a recommendation to enter into this trade. Entering into this trade is your own decision and you alone are responsible for any losses that occur.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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