2009-06-08

Why MacAllan is giving me a headache and squeezing Orange Juice

General Markets

MacAllan* indicator - dedicated to the famous trader Allan who considers MACD as his other child - is a bit devious indicator for entering a position. But it is quite good at pointing out divergences and possibly indicating exit points (or tightening of trailing stops) once it starts showing divergences from the prevailing trends. 

I do not use many indicators in my trading, I mostly look at the price and moving averages but I have started watching MacAllan for some time after discussions on this subject at Oscar's premium room. I see that many a times MacAllan actually signals turning points in a trend. Especially if it is preceded by a H&S pattern in MacAllan with prices making new highs all along (opposite for short). This divergence would mean that prices are ripe for a turn down and if that coincides with my fib based projections or profit targets, I would look to trim or exit altogether leaving a minor runner or a limited risk option/butterfly position.

Since the turning point in March 2009, may markets have rallied without a pause, and that itself is giving me a cause of concern. On top of that now MacAllan is pointing to bit downside on these markets. It has caused me to exit most of my long term positions for the time being and in some markets I am actually reversing trade. Following is a brief review on markets where MacAllan is giving a hangover.

ZSn9 : 

Beans have had quite a run up and now looking exhausted, especially old crop (July) contracts. MacAllan has turned down as well after indicating the divergence. I am looking to actually take short positions in ZS for short term with stops above highs targeting 1102 at the first instance.

ZMn9/Zon9 :

Similar situation as bean but much exaggerated. Better short than beans. 

ES:

One can see H&S completed on ES MacAllan. It has still not turned negative but once it goes negative, it looks like a good short.


HG:

On a longer term perspective, HG MacAllan has formed H&S. It is still positive but once negative, I will look for a significant pullback.

OJ:

Orange Juice is now getting squeezed. I have taken a short position at 91.50 given MacAllan has turned negative after a distorted H&S. I will look for possibly 83 region on that short.

SB:

Sugar did not even make H&S on MacAllan. The run was extended in Sugar and therefore it is quite ripe to fall. I had started building position in 15 Puts and now I am taking outright shorts with stops above the high (16.05). 

KC:

Coffee MacAllan has turned negative but H&S is not formed. I am cautiously short on Coffee as of now via certain option positions. Run to 125 level is possible.

* MacAllan is nothing but our simple MACD indicator but it is more fun to call it MacAllan. It is also of course a famous Scotch whiskey. Try Mac 18 for best pleasure.

12 comments:

  1. i am out of my coffee short positions as well today on this drop.

    ReplyDelete
  2. Vs,

    I really hope you use the Whiskey the correct way. Not sure because you talk about H&S patterns in MacAllan. Maybe I'm just misunderstanding .... We probably should have some kind of confirming talk about this since I am not happy should you get constant headaches!

    Best regards
    Allan MacAllan

    ReplyDelete
  3. I did briefly explain to VS that MacAllan is not simply a MACD but rather the special way it used by the Swedish trader..... I'm still studying to fully understand, that's why I keep asking for confirmations.

    Quin

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  4. I use MacAllan (sorry MACD), mainly to exit positions instead of entering. However this chart should explain what I mean by H&S on MacAllan. The price is making new highs, and initially MacAllan is following it, i.e. confirming the trend. Then the price continues to make new high but MacAllan begins to get exhausted and finally makes the right shoulder. I would usually be out of most of my long positions around this point barring some well in the money runners.

    [URL=http://www.chartupload.com/viewer.php?file=qamipzwclyga3wh48fo.jpg][IMG]http://www.chartupload.com/images/qamipzwclyga3wh48fo_thumb.jpg[/IMG][/URL]

    And if the above html mumbo jumbo does not work, the simpler url

    http://tinyurl.com/nj9bs8

    ReplyDelete
  5. My OJu9 short was closed at .8345. I rolled the OJn9 short from .9150 to u9 contract with +.0330 spread.

    ReplyDelete
  6. HOW TO TRADE MACD DIVERGENCES ON A 60 MIN CHART (MACALLAN).

    CK,

    This is mainly for you since you showed interest in the subject, but I would be happy to see Dee, VS, and Quin also improve their trading (if possible) by using this method.

    VS, I mentioned some time ago, that I had some other ideas to test, and this is actually what I had in mind. Please think about how to verify that this method is as good as I claim it to be.


    First a little background information about this indicator:

    The MacAllan system is something I learned years ago when listening to a very good radio show every Friday evening with a trader called Jack Steiman (thx Diana for helping me find him again). He can these days be found on the following web site: http://www.swingtradeonline.com/reg/mc/n

    This way of looking at the MACD is not the most common. Usually traders are looking for crossovers, and trade them accordingly.

    Mr. Steiman taught me something more intriguing, sophisticated and reliable. The timing can be somewhat difficult, but that’s where personal touch comes in! I am not using the MacAllan together with anything else than price and volume. Mr. Steiman solely based all entries and exits on these signals!

    This is how it works:
    -------------------------

    When the price makes a new high you want the MACD to make a new high as well. When the price makes a new low you want the MACD to make a new low too.

    When the price is making a new high, but the MACD is not, we have something called NEGATIVE DIVERGENCE.

    When the price is making a new low, but the MACD is not, we have POSITIVE DIVERGENCE.

    When these instances of positive or negative divergence occur it means caution if you have a trade in the opposite direction. Many times you can go long or short based on the divergences, but like almost everything else, nothing is 100% certain.

    THE ONLY THING TO FOCUS ON IS THE PRICE MAKING A NEW HIGH OR A NEW LOW. IF IT DOES NOT, IT IS A NON-EVENT.

    Since Quin is the prince of charting (Oscar is still the king), I am hoping that he will post some good charts showing these events. Quin and I have watched these divergences develop on different charts for several weeks now, and I think he is slowly but surely also becoming a believer!!

    Don’t hesitate to ask should you have any questions.

    Happy trading!
    Allan

    ReplyDelete
  7. Thanks a lot Allan, Yes I have started looking at it for past few days after the discussion here.

    Traditionally I have been using MACD divergence as you described but only on Daily charts and also mainly to exit my positions not for entry. I still do not understand how to create a trade plan for entry.

    To test performance, it would help to define the trading rules bit more mathematically in terms of where to enter, what stop to put etc.

    When I look for divergence (typically on daily chart) I look at it in the following manner.

    - If price has made a new high, see what has MACD done. If MACD followed the price and made new high, no divergence. Watch.

    - If MACD has not made a new high - Alert. A possible Divergence in the play.

    - Now I wait for price to "stop" making new high. I.e. close below the bar which made the new high. If MACD is still not on new high, the divergence is confirmed. As you can see, it would take at least two bars (one for new high and one for close below earlier new high bar)

    - I would typically take a short position here with stop above the new high recorded earlier. I treat this signal as correction and not trend change and therefore I target exit on 50% retrace of the earlier prevailing trend.

    Now applying this for intra day (60 min chart) is bit tedious as it would take at least 2 hours for the signal to confirm and then it is chop time anyway! Your thought on this aspect are welcome? How and where will you take entry and with what stop (and also what profit objective)

    ReplyDelete
  8. zb chart today

    Here is an example how I would have traded ZB today. This is Amber spot for me. I am now watching if we break above the bar which cause the new low without MACD confirming. If yes, I will have my stop where I indicated on the chart.

    Allan/Quin - confirm if this is the way to trade MacAllan.

    ReplyDelete
  9. Thanks for posting this Allan, I will look it over this weekend.

    CK

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  10. VS,

    After reading your comment “Now applying this for intra day (60 min chart) is bit tedious as it would take at least 2 hours for the signal to confirm and then it is chop time anyway!” I had in immediate off the top of the head response.

    Simple just take the signal from the 60min chart and drill down to a lower time frame for the trigger, a concept learned elsewhere. I decided to look at the 1min chart first and this is the result of looking back at the @USU9/ZBU9 from Friday.

    This chart is the same as the one you posted but I have highlighted the divergence and the data until the close on Friday shows how well it played out (again).

    http://www.chartupload.com/viewer.php?file=ef02ln5k985u6djo07bf.png

    This is the 1min chart with the timeline representing the start of the 60min bar that formed the divergence setup.

    http://www.chartupload.com/viewer.php?file=gfganbcfohueawizv4ds.png

    This shows that you could have entered only 11 minutes into that bar with a much better entry price and smaller stop.

    Obviously this is a one off event, I have a feeling that 1min may be too small a timeframe to give consistent results but I shall be monitoring over the coming weeks and will let everyone know my conclusions.

    Good Trades,
    Quin

    PS. How do I make the URL become a link?

    ReplyDelete
  11. This is really interesting. No wonder I bestowed the honour of Whiskey Connoisseur on you and Allan. I must try it next time.

    PS: Regarding putting hyper link in blog comment you need to use <_a_> HTML code.

    <_a_ href='valid link'> Text For The Link <_/a_>

    Remember to remove "_" in front and back of "a". I had to use them to show what to put in comment box.

    You can also use "preview" option to see how your comment will look before posting.

    ReplyDelete
  12. OK I just wanted to repost the links.

    60min Whisky

    1min trigger

    Investigations show that MacAllan Whiskey is 70 degrees proof, lets see if we can create a MacAllan Cocktail (Shaken not Stirred) of equal strength.

    ReplyDelete

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-VS