In this third of three blog posts in my series on the MACD indicator, I’m going to show you how I use the MACD indicator to find a short list of stocks that are setting up potential buy signals. To do this, you will need a technical screening tool. There are several available today suitable for this purpose but most are prohibitively expensive for most novice traders. If you are on a tight budget, I suggest using the screen building tool in Stockcharts.com. The illustrations below are from this tool.
First, I want to build a base screen. This foundation will ensure that the ticker symbols that will go on your short list are stocks (rather than ETF’s or mutual funds), sufficiently liquid, not penny stocks, and do not trade on a foreign exchange. Of course, you may adjust the following parameters to suit your own trading preferences. For my money, I always build every technical and fundamental screen upon the following foundation:
If you are using Stockcharts, this is what your base screen will look like at this point:
Next, I add a filter that will ensure that the stocks that pass through the screen are in at least a long-term uptrend. Since this is a bullish screen, I want to avoid stocks that have been beaten down by the market. While those can be great long-term holds, these are typically not the kind of stocks I want for trading.
There are a variety of ways you can filter for long-term uptrends. You can use long-term and medium-term moving averages, you can use a moving average on the weekly chart, and so on. The simplest way, however, is to screen for stocks that are currently trading above their 200-day simple moving average. Thus I like to add the following parameter to my base screen:
The next thing I add is a filter that puts the MACD line under the 0-line. I want this in the screen because I want to find bullish MACD buy signals only after a significant pullback. Because these stocks are currently trading above their 200sma, I know they are in a long-term uptrend. But I also want to know that they have pulled back enough to take some of the risk out of that uptrend. Thus I add the following to my base screen:
Once I input this into Stockcharts, my screen filters now look like this:
Now I want to add filters that limit my stocks to only those that satisfy two requirements: that today they are showing a bullish cross of the MACD line over the MACD signal line, and that this isn’t just a whipsaw move by the MACD but that it is a signal by the MACD line that only came after several days of being under the signal line. Three days is usually sufficient for this, but you can go further out if you get too many candidates passing through. Here, then, is what I add to my screen in order to accomplish these two requirements:
Once these filters have been inputted, my screen looks like this:
The last filter I put into my screen is the requirement that three days ago the MACD histogram is greater than the MACD signal line by at least 25%. This ensures that the pullback is a strong one. With this final filter in place, the screen that I use to create a short list of stocks making new MACD buy signals looks like this:
Let me show you how powerful a screen this is. I ran the screen today but backdated it to ten days ago. There were eight stocks that passed through the screen on that date. I saved these into a watch list and reviewed the charts one by one. Of these, two are mostly flat, and six are trading significantly higher than ten days ago. Take a look:
Give it a go. Remember that you are only creating a short-list here. You will want to do further research on each passing stock. Never buy a stock just because it passed through a technical screen. But screened stocks are a great place to start your research process.