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Where Did the Green Go?
by kensey

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Time Warner Inc (Holding Co) (TWX)







Is it time to bail out of a stock when a bullish green bar is pulled down? Not necessarily. The MACD green trending bar that was born in early March was pulled down in late March. This happened because the fast line crossed below the signal line due to the momentary dip in prices in late March. This was not a serious dip. Prices were able to stay above the 13-day moving average which is a sure sign of short-term health. In fact, after forming a cup shape ("cupping") on the 13-day EMA for a few days, the rally in prices continued.

What happened here? The rate of increase in prices in TWX from mid-February through March was remarkably constant. If the rate of increase in prices is constant, any divergence will trigger a change of condition one way or the other. A momentary dip will cause the fast line to cross beneath the slow line and the trending bar will be taken down.


When the MACD green trend bar was taken down in late March, an interesting thing happened. Prices kept rising throughout April and May, but the MACD lines on the indicator graph gradually declined.

The reason for this phenomenon is that the rate of change in the upward acceleration in prices slows considerably. Prices are still going up, but not as fast. Once the rate of increase in prices slows, the longer term moving average (26-day) starts to catch up to the shorter term EMA (9-day). Therefore, the difference between these two moving averages decreases. Hence, the decline in the MACD lines.

If you eyeball the 13-day and 50-day EMA lines on the price graph, you can see that on April 1 (or thereabout), the purple line (which represents the 50-day EMA) starts to close in on the light green line (which represents the 13-day EMA). MACD uses moving averages of different lengths than these, but the effect is the same.

So, when a bullish MACD green bar stops it doesn't mean that you should bail. It does mean that it's time to start paying closer attention. You don't want to get shaken out during normal retracement action. Normal and healthy retracement action will stop a bullish green bar, but that doesn't mean you have to exit a position, only to see prices resume rising after you get out.

I usually wait for the MACD lines to dip below the centerline before getting completely out. The end of a MACD green bar might be a good time to lighten the load and take some profits, but it doesn't necessarily call for dumping out of your entire position.

Many stocks stay above center for years. You want to hold onto those.


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