Using Pmo Macd Indicators

Of all the momentum indicators out there, I like PMO, developed by Carl Swenlin. This proprietary indicator is based on a rate-of-change calculation, which is exponentially smoothed. PMO behaves similar to the MACD momentum oscillator developed by Gerald Appel. We use the weekly PMO and MACD on the indexes to pick trends that usually last from three to six months.

Figure 6.13 shows the topping process in the S&P 500 in January to March 2004, as discussed previously. Notice here that both the PMO and MACD indicators had bearish crossovers and triggered sell signals in early March 2004, which predicted a decline that would last several months. The next bullish weekly crossover on the PMO and MACD did not come until mid-October 2004; therefore, the decline from the March high lasted seven months. During this time frame, traders would have been out of the market or short.

Also notice a bullish weekly crossover of PMO and MACD came in March 2003, and both PMO and MACD trended higher into March 2004, which would have kept traders long for an entire year. This was a good time to be in the market because traders clearly had the wind at their backs. Note that PMO gave a clearer view to stay long from March 2003 to March 2004 than MACD, which is one of the reasons I prefer PMO over MACD.

Next, let 's examine the bullish crossovers of PMO and MACD in SPY, from early 2004 to early 2007, and compare them with the bullish signals generated by McClellan Summation Index in the same time frame. PMO and MACD buy signals are illustrated in Figure 6.14, and the bullish signals triggered by McClellan Summation Index are represented in Figure 6.15 -

FIGURE 6.13 Momentum Indicators PMO and MACD, Highlighting Bearish Weekly Crossovers that Triggered Sell Signals in March 2004 Source: Chart courtesy of DecisionPoint.com.

Remember, a bullish signal is triggered when the Summation Index trades below —500 and then turns up.

In all instances the Summation Index triggered buy signals before PMO and MACD had bullish crossovers. Also notice that, in most cases, MACD had earlier buy signals than PMO.

To complete the buy signal setup, let 's take a zero in on one of the bottoms and do a volume analysis of that low. Figure 6.16 focuses on the April 2005 bottom. A "Selling Climax Day" (see Chapter 4) occurred on April 15, 2005, with volume near 2.85 billion shares in the S&P 500. The next day, the price low was put in, which became the target for a future retest. On April 20, a "False Break" occurred with low volume that implied the decline would not continue.

A retest of that same low came on April 29 on lighter volume, which was another buy signal. Referring back to Figure 6.15 ' we can see that this bottom corresponded exactly with the Summation Index triggering a buy signal by turning up from below -500. Traders who had done

FIGURE 6.14 PMO and MACD Indicators Trigger Buy Signals in SPY during

2004-2007 Time Frame

Source: Chart courtesy of DecisionPoint.com.

FIGURE 6.14 PMO and MACD Indicators Trigger Buy Signals in SPY during

2004-2007 Time Frame

Source: Chart courtesy of DecisionPoint.com.

these analyses would have known it was time to get long the market, and really would have put the wind at their backs. More conservative investors could have waited for the weekly PMO and/or MACD to turn up, or they could have bought and put stops below the price low of the "Selling Climax Day," just in case there were more retests of the recent lows. Having buy signals triggered by both breadth and volume analyses, however, the odds were very good that the momentum indicators would be turning up soon, as well.

Now let 's switch to the bearish crossovers of the PMO and MACD in the time frame of early 2004 to early 2007, comparing them with the bearish signals generated by the McClellan Summation Index in that same time frame, as illustrated by Figures 6.17 and 6.18.

As Figure 6.17 shows, PMO and MAC sell signals are always after the top because price weakness needs to be present first in order for these indicators to turn downward. By contrast, the Summation Index (see Figure 6.18) measures breadth weakness as a top is approaching

FIGURE 6.15 McClellan Oscillator Setups for Buy Signals in NYSE for 20042007, Corresponding to Figure 6.14 Source: Chart courtesy of DecisionPoint.com.

and give a "heads up" for potential topping patterns. Notice that the signals generated by both methods were very closely aligned time-wise in picking the same direction in the market. PMO and MACD did pick a top in early 2007, but the McClellan Summation Index negated that bearish signal by turning bullish (which occurred when the Summation Index traded above its previous high).

By combining breadth analysis with momentum analysis, traders can have more confidence when putting their money to work. (The volume

FIGURE 6.16 Snapshot of April 2005 Low, with Selling Climax Day Followed by False Break on Low Volume

Source: Chart courtesy of DecisionPoint.com.

FIGURE 6.16 Snapshot of April 2005 Low, with Selling Climax Day Followed by False Break on Low Volume

Source: Chart courtesy of DecisionPoint.com.

analysis sell signal for SPY at the February and March 2004 high can be reviewed in Figures 6.10 and 6.11.)

Figures 6.19 and 6.20 spotlight the high in August and September 2005 in the SPY. Figure 6.19 is a weekly candlestick chart. The week of August 5 tested the previous high at 124.74 on lighter volume and closed below the previous week's high, which triggered a sell signal. The volume during the week of August 5 was not enough energy to get through the weekly high of July 28, and therefore the market reversed.

Notice that on the week of August 5, volume did not shrink a great deal, which is only a weak sell signal. As stated in Chapter 4, the greater the degree of volume shrinkage on a retest of a previous high, the stronger the sell signal. The weekly August 5 test of the previous high of July 29 had only a minor degree of shrinkage in volume, and therefore a weak sell signal resulted.

The market did go down for a month and then rallied back to test the weekly July 29 high during the week of September 9. Notice that the

FIGURE 6.17 PMO and MACD Sell Signals Generated in SPY in the 2004-2007 Time Frame

Source: Chart courtesy of DecisionPoint.com.

FIGURE 6.17 PMO and MACD Sell Signals Generated in SPY in the 2004-2007 Time Frame

Source: Chart courtesy of DecisionPoint.com.

weekly September 9 test of the July 29 high came on much reduced volume and triggered a stronger sell signal compared to the sell signal on August 5. The weekly sell signal of September 9 lines up well with the bearish crossover of the PMO momentum indicator and the McClellan Summation Index sell signal in September 2005, as shown in Figure 6.18 . Therefore, the week of September 9 generated the better sell signal.

Figure 6.20 (on page 133) shows the Ord-Volume chart of SPY for the same time frame. Although its not depicted here, Ord-Volume did generate a sell signal at the late July/early August high. However, Ord-Volume indicated much more going into the September 2005 high.

From the late August 2005 low, Ord-Volume had a strong first up leg of 83 million as the market hit a high of 123.15. This was followed by a weak down leg with Ord-Volume of 47 million, which implied that the uptrend should continue because there was more energy pushing upward than downward.

FIGURE 6.18 McClellan Oscillator Setups for Sell Signals in NYSE for 20042007, Corresponding to Figure 6.17 Source: Chart courtesy of DecisionPoint.com.

The next up leg tells a lot about the upward strength in the market. Ord-Volume on that up leg declined to 45 million—nearly half the energy of the previous up leg. This shows that the uptrend is very weak. Normally, indexes do not have this degree of volume shrinkage from one leg to another as stocks do. When an index does have volume shrinkage of this magnitude, it is showing that there is a great deal of weakness in that

FIGURE 6.19 Candlestick Chart for SPY Shows a Retest of the Weekly July 29 High

Source: Chart courtesy of DecisionPoint.com.

FIGURE 6.19 Candlestick Chart for SPY Shows a Retest of the Weekly July 29 High

Source: Chart courtesy of DecisionPoint.com.

trend. A sell signal was triggered when the SPY closed below the previous high of 123.15.

Notice on the down leg from the 124.74 high Ord-Volume increased by 50 percent to 68 million compared to the previous up leg volume of 45 million going into the 124.74 high. This increase in volume on the down leg confirmed the downtrend. (See Chapter 3 to review Ord-Volume techniques.)

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