Here's How To Use The MACD For A Sell Signal

My favorite indicator, other than the combination of price and volume, is definitely the MACD.  I've studied it for years and I use it as a very important momentum indicator in my trading strategy.  It's mostly a lagging indicator as it uses prior closing prices to determine the difference between two moving averages.  But it also provides us a predictive benefit as price momentum begins to slow before we actually see prices deteriorate.  As an example, let's look at the chart of Oclaro (OCLR):

For two months, prices rose and were accompanied by higher MACD readings.  That's a signal that momentum is strengthening because the short-term moving average is rising faster than the long-term moving average.  Pullbacks during such advances tend to be shallow and the rising 20 day EMA typically is problematic for sellers of the stock.  But after a negative divergence emerges, you have to begin looking for an exit point, especially if you're a short-term trader.  In mid-September, OCLR printed a negative divergence but on that breakout, volume exploded higher.  It's difficult to argue a stock is losing momentum when heavy volume accompanies a breakout.  This is very important - remember that the MACD considers price only, not volume.  So a better sign to me with regard to slowing momentum is when the negative divergence occurs with light to moderate volume - as it did earlier this month.  Volume was average on the last breakout.  You don't want to be buying stocks breaking out on average volume with a negative divergence in play.  Instead, show patience and discipline and allow stocks to "reset" their MACDs at or near centerline support.  If OCLR prints a hammer today on its 50 day SMA, we could see this become a very tradable bottom in the near-term.  At a minimum, it's certainly a much better reward to risk trade now than where it was with the negative divergence emerging.

Happy trading!

Tom