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ARCHIVE:    JUNE-NOVEMBER 1999  

An InvestorLinks article
distributed every market day.

Healtheon Corp (NASDAQ: HLTH)
Market Call™ for December 1, 1999
Contributed by Mark Seleznov, TrendTrader.com.

The purpose of this Market Call section is to educate readers in technical analysis patterns and indicators. As with all investment information, you need to research information and consult your financial advisor before initiating any strategies that are contained in Market Call.

Also, you must realize that as with all trading strategies, opinions can change quickly depending on market conditions and developments.

This column tries to present historical examples, potential set ups, and examples of entry and exit strategies.

MACD "Moving Average Convergence/Divergence"

The MACD is a trend following momentum indicator that shows the relationship between three moving averages of prices. This method can be used for any time frame. It could be 5 minute bars, 15 minutes bars or daily bars. Many traders will also trade in multiple time frames using a longer time frame for trend, and the shorter period for entry and exit.

The MACD is the difference between a 26-period and 12-period exponential moving average. A 9 period exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. On the charts below, the MACD line is the green colored line, and the trailing, slower moving line is the signal line. Some technical analysis programs will show the MACD as a histogram bar.

There are three popular ways to use the MACD: crossovers, overbought/oversold conditions, and divergences.

The most common use is as a crossover method. Using this interpretation, the trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero.

Some traders will use MACD as an overbought and oversold indicator. When using the indicator in this manner, when the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions vary from security to security.

The other way some traders use MACD is to spot divergences from an anticipated movement. Since there are no indicators or patterns that work all the time, reactions against the anticipated move can signal a major move. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

I will also use MACD combined with the breaking of support. Support can be defined differently depending on the strategy. I like using the lowest low and highest high of the last 20 bars depending on my time frame or a change in moving average direction.

Let’s look at Healtheon Corp. (NASDAQ: HLTH).

During the week of November 15, HLTH traded in a very tight trading range. On November 23, HLTH broke out of the channel and gave a MACD Buy signal.

After this breakout, a nice trade took HLTH up to 50 � yesterday. HLTH then ran out of momentum as indicated by the MACD indicator.

I find that MACD works best from very overbought or very oversold conditions. An ideal exit would have been Monday afternoon on the initial signal. However, I would exit any long positions in HLTH.

An aggressive trader might want to Short HLTH here on any morning weakness. I would place a stop at 48 �.

Chart courtesy of
Silicon Investor
 


Interested in adding Market Call to your website?
Click here for details: Market Call Information

Mark A. Seleznov is a General Securities Principal and Managing Partner of Trend Trader, LLC, a NASD, SIPC broker/dealer firm located in Scottsdale, Arizona. A professional trader for over 25 years, Mark was a Market Maker on the Philadelphia Stock Exchange, a Retail Registered Representative, and futures trader. Mark is an author and recognized expert in equity Day Trading. He conducts seminars in Equity Day Trading and offers his firm traders training and support. If his firm holds any positions in the public companies he writes about, it will be noted at the bottom of his article.

Market Calls is a daily syndicated column on trading by Mark A. Seleznov, Managing Partner of Trend Trader, LLC. For information on obtaining Market Calls for your web site, newspapers, or publication, contact
Trend Trader, LLC at 602-948-1146

Disclaimer: Trading in securities may not be suitable for all individuals. Consult your broker or other professional to determine your suitability. This is not an offer to buy or sell securities. The advice given above is of a general nature and should not be taken as a recommendation to buy or sell the referenced security.

 
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Last modified: March 17, 2001

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