Identifying Cycle Tops With MACD Indicator

Source: The Chart Store


This may be a on the bit technical side for some readers, but I think its important:

Ron Griess writes “If we accept the cycles in the table above, is there a way the weekly MACD indicator can be of assistance in identifying market tops?

He thinks there is: “We have taken each of the cycles shown in the table and have used red arrows on both the price in the top panel and the indicator in the bottom panel to mark the cycle tops and bottoms. We have also added either a 1 or a 2 on the right side of the arrows in the bottom panel.”

Here is how he sees the historical MACD patterns:

1. We prefer to calculate our MACD moving averages and show them as percentages rather than points. This allows us to compare markets of different time periods on a relative basis rather than an absolute basis. Our eyes see that tops rarely exceed + 5% with + 4% being the topping area in most recent cycles.

2. Tops that occur coincident with the high spike in the indicator have only happened on three occasions and are marked with a 1.

3. Normally, tops occur when the MACD indicator “diverges” with price, and we have marked those occurrences with a 2. After a bottom, the market and the indicator surge higher. The indicator often sets a high for the cycle on that initial surge. Market peaks for the cycle usually find the indicator rolling over from a lower point than that initial surge.

4. The current cycle is unfolding as a type 2 pattern. The initial surge took MACD (12,26) to 4.01% and we would expect that to be the high for this cycle. We already have two lower peaks in place as the MACD is making yet another attempt to move higher. We would expect this move back up to roll over without exceeding 4.01%, thus setting the stage for a turn back down and a decline into the “four year cycle” low.

Very interesting stuff . . .


More S&P MACD charts after the jump






For more information, contact Ron Griess at The Chart Store

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