There are many ways to use the MACD indicator, developed long ago by Gerald Apel. This is one of them. Maybe. Nothing more, nothing less.
First the caveat: what follows is NOT a “trading system” or even something that you should consider on a standalone basis.
(See also Speculative Ideas: From A to Z)
MACD
The MACD indicator uses exponential moving averages to identify the underlying trend for a given security and is also used by many traders to identify divergences which may signal an impending change of trend.
Figure 1 displays the daily MACD for ticker SPY.
Figure 1 Courtesy AIQ TradingExpert
The MACD ‘Tell’
While this is NOT intended to be a mechanical signal, I am going to put specific rules on it just to give it some structure. The rules:
- If the daily MACD (12,26,9) has declined for at least 7 consecutive trading days AND
- The 2-day RSI is at 64 or above
Then an “alert” signal is flashed. The key thing to note is that if the MACD ticks higher on the day that the 2-day RSI rises above 64, the signal is negated.
Before proceeding please note that the 12,26,9 parameter selection is simply the “standard” for MACD. Also, there is nothing magic about 7 consecutive days – so one might experiment with different values there. Finally, using the 2-day RSI and a “trigger” value of 64 are also both arbitrary. There may be better values and/or different overbought/oversold indicators to use.
Goldman Sachs
A “classic” example of the MACD Tell appears in Figure 2 using ticker GS.
Figure 2 Courtesy AIQ TradingExpert
The MACD Tell is typically best used as a short-term indicator. In this case a short-term trader might have considered playing the short side of GS – or even better – using option strategies such as buying puts or selling bear call spreads.
Summary
No one should rush out and start trading put options based on this indicator (or any other indicator for that matter) without spending some time doing some homework and testing out the viability for producing profits.
In reality, this is the type of indicator that should typically be combined with “something else” and/or used as a confirmation rather than as a standalone approach.