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This was the most volitile week I have ever witnesed, especialy Friday when the market ran about 11% in 1 hour! Our G-line forecast panned out pretty well this week despite not having a pullback we were anticipating mid week, nevertheless the market offered great trading opportunities especially Thursday and Friday.

Here is how we did this week -

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Here is the actual alert our members received-

10 AM Morning Update for 10/8/2008

Price action at this time is bearish suggesting potential downside movement.

We currently have a gap or lapse condition of 0.00 points.
Please be cautious of the impact of morning gaps on price action.
Further alerts will be provided if market conditions warrant.

** ALERT ** Time= 1005: The current price action is bearish. Short positions taken on upside rallies may be beneficial between now and the close.

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Tuesday Alert is Worth $2,562.50 :)

9-29-08 Market Crash! Daily Alert Results

September 23rd Alert

Forecast of the Day

NEW FEATURE - Daily Guidance Alerts

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Do you use MACD? Have you been successful at it? Have you changed your mind on MACD after reading this article? What indicators do you use? Would you like me to debunk any other indicators? i’d like to hear from you, leave a comment below.

When something has a name that has more syllables than I can count, it usually keys me in to the idea it could be a bunch of fluff. Moving averages are great if they are used correctly in technical trading. This is true for one reason; they introduce delay.

The amount of delay moving averages introduce is a function of their length. A 20 period moving average, for example, will introduce 10 periods of delay from the data on which it is based. If you want it to track the data closely, you will offset it by 10 periods (1/2 the average length). Then, when you look at it on your chart, it will track the data very closely. The tradeoff for getting this close tracking capability is that the data will then be current to only 10 bars ago. Let’s look at a graphic so we can see what this means (compliments of TradeStation):

The graph above shows a 10 minute chart with a 30 period moving average on it (the light blue line). As you can see, the turning point on the moving average that is on the edge of the ellipse on the left comes 15 bars after the actual price high. On the ellipse on the right, the low on the moving average also comes 15 bars after the actual low in price. On average, a 30 period moving average, will introduce 15 periods of delay. If we offset the moving average by this amount, it will perfectly coincide (on average with the turns in the market).

Now, with the 15 period offset (1/2 the 30 period moving average length), the moving average tracks the turns very accurately. This half wave delay that moving averages introduce is the single most important issue you need to understand when using moving averages in your trading.

Will the half wave moving average always track the data as perfectly as above? No, it will not. This is due to the fact that the length of the moving average length does not match the cycle length that is present in the original data. This means different base moving average lengths will track the underlying data more accurately at different times. Typically, the moving average length that will track the data most accurately is constantly changing. Keep this in mind as we proceed into our discussion of Moving Average Convergence Divergence.

The base Moving Average Convergence Divergence in most charting packages is made up of two moving averages that are 12 period and 26 periods in length (fixed). Then the computation is to take the difference between these two averages in order to generate what is called a “Signal Line.” The Signal Line is then delayed again by another (exponential) average of 9 periods. In plain English, a Signal Line is the delayed difference between two moving averages (delays). Basically then, when the faster moving average (12 period) is above the longer moving average, the difference will be positive and will indicate the market is going up. When the faster moving average is below the longer one, then the difference will become negative, indicating the market is declining.

To me, it is impossible to be a MACD user because simply looking a chart would tell me if the market is rising or falling. Looking at the chart also tells me this with no delay. This is particularly important when you add the complexities of having a computation made of two (delay introducing) moving averages that are not in sync with the cycle length of the market at all. These complexities can result in the MACD doing some very strange things, particularly in abruptly moving markets where the cycle length is changing or becoming longer than the base 12 and 26 period averages. Let’s take a look at one example:

In the graphic above, we can see the MACD on the bottom. It has both the 12 and 26 period averages in the graph and the signal line, which is shown as a histogram. As you can see, starting just before mid day, the MACD started trending down (when the shorter 12 period yellow line crossed below the longer 26 period line). The Signal Line goes negative at this time, while the market continues to go up. Due to wave length changes and delays introduced by the moving average components, the MACD has actually inverted from what the market was actually doing. It would take it around 26 bars, or periods (plus or minus) to correct this.

The question is this, is the inversion factor keying us in to a going inaccuracy in the MACD? Is there a better trend indicator that did not have these issues?

Let’s look at a simple trading system optimization grid based on trading the MACD and see how stable it is on its own. For simplicity, I will only optimize the 12 and 26 period lengths and not the MACD delay that is introduced by the 9 period exponential moving average. I will allow the system to simply stop and reverse, always being in the market.

Over a testing period of two years using the MACD strategy for generating buy and sell signals on the S&P Emini contracts on a 10 minute chart, the results are clear. Not one single parameter set was profitable ( a much larger test was conducted than is shown). Ouch!

What this tells us is that doing the exact opposite of the MACD is a better starting point for system development than what conventional wisdom would have us believe. Of course this will vary according to time frame (i.e. 5 minute, 10 minute daily data etc.). For fun, let’s flip the buy signals into sell signals and run our test again. Here are the results:

Wow! That is pretty amazing! Sorting to the top sets, we see a couple interesting things. One is the profit is remarkable. Two, many of the best sets optimize to a period of 2 on the short term moving average. This tells us the shorter period average portion of the MACD (as well as other delays in the Signal Line) could probably be eliminated, further discrediting the fancy design of the MACD. This is much beyond my personal expectations as to what we would find in these tests!

Before getting too excited, is this tradable? No, unfortunately it is not. The average trade is only about $15, less than the expenses of trading. Ultimately what this tells us is we are at or about the threshold of randomness with our MACD study. Is this to say MACD has no value? That is up to you. As for me, next time I want to know if the market is going up or down, I will look at a chart. It is much easier to understand what is going on without introducing layers of delays and inability to track cycling properly. Training one’s eye to see things directly from the chart is the best way for me.

Could the MACD be used in other ways? Certainly it could, but perhaps a moving average alone could accomplish much the same thing without all the problems introduced by this fancy and verbosely named indicator.

Do you use MACD? Have you been successful at it? Have you changed your mind on MACD after reading this article? What indicators do you use? Would you like me to debunk any other indicators? i’d like to hear from you, leave a comment below.

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Here is a comment sent to us today from one of our members:

“Hey, your last alert was right on. Made enough $ for the day. Thank you, keep up the great job!”
- Kava

Here is today’s alerts:

10 AM Morning Update for 10/7/2008

Please be aware, without respect to the EMF forecast,
Price action at this time is neutral suggesting potential moves in either direction.

We currently have a gap or lapse condition of 12.25 points.
Please be cautious of the impact of morning gaps on price action.
Further alerts will be provided if market conditions warrant.

** ALERT ** Time= 1145: The current price action is bearish. Short positions taken on upside rallies may be beneficial between now and the close.
If we have declined > 40 points in the near term, then successful
short trading may be diminished

More on DailyGuidance Alerts:

9-29-08 Market Crash! Daily Alert Results

September 23rd Alert

Forecast of the Day

NEW FEATURE - Daily Guidance Alerts

Try it today!

These new terms come with the bail out bill as a package:

CEO - Chief Embezzlement Officer.

CFO - Corporate Fraud  Officer.

BULL MARKET — A random market movement causing an investor to  mistake himself for a financial genius.

BEAR MARKET — A 6 to 18  month period when the kids get no allowance, the wife gets no jewelry, and  the husband gets no sex.

VALUE INVESTING — The art of buying low and  selling lower.

P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.

BROKER — What my broker has made me.

STANDARD & POOR — Your life in a nutshell.

STOCK  ANALYST — Idiot who just downgraded your stock.

STOCK SPLIT — When  your ex-wife and her lawyer split your assets equally between  themselves.

FINANCIAL PLANNER — A guy whose phone has been disconnected.

MARKET CORRECTION — The day after you buy stocks.

CASH FLOW – The movement your money makes as it disappears down  the toilet.

YAHOO – What you yell after selling it to some poor sucker for $240 per share.

WINDOWS – What you jump out of when you’re the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR –  Past year investor who’s now locked up in a nuthouse.

PROFIT – An archaic word no longer in use.

by Don Rasmussen from Campaign For Liberty

That was a tough week for our G-lines, needless to say the market was full of emotion and news anticipation. On Monday when The Bill did not pass they decided to tank the market, on Friday when they passed “the bill”, the market tanked again?! Stratagies to use in this type of market is to cut back on your lot size and keep a close eye on your positions!

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Congress approved a $700 billion bank bailout Friday, but stocks tumbled as investors worried that the plan wouldn’t be enough to stem the credit crisis or keep the US economy from falling into a recession.

President Bush signed legislation in July that raised the debt ceiling to $10.615 trillion. Meanwhile, the financial bailout legislation passed by the Senate last night would raise the debt ceiling further to $11.315 trillion.

Thank you Mr. Paulson, thank you from my future children and grand children.

If you had purchased $1000 in shares of Delta Airlines one year ago, you would have $49 today. If you had purchased $1000 in shares of AIG one year ago, you would have $33 today.

If you had purchased $1000 in shares of Lehman brothers one year ago, you would have $0 today. But If you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling refund, you would have received $214. Based on the info provided, the best current investment plan is to drink heavily and recycle. It is called the 401(keg).

A recent study found that the average American walks about 900 miles a year. Another study found that Americans drink, on average 22 gallons of alcohol a year. That means, on average, Americans get about 41 miles to the gallon!

- Suggested by Randy Gale