Most investors are extremely skeptical when it comes to timing the market today. After all, some of the most trusted sources of financial information say it can't be done.
Charles Schwab, Forbes, and CNBC all say you can't time the market. And by "time the market," they mean you cannot determine where the markets as a whole are going over the long term.
They're right. Timing the market as a whole is nearly impossible. There are too many unpredictable circumstances in the market.
But that's not what we're talking about when we talk about timing the market. When we talk about market timing, we mean determining when to enter and exit trades of specific stocks or options.
What's even better is you can make a 100% profit in under 30 days by timing the market. In fact, last week Money Morning Options Trading Specialist Tom Gentile showed readers a way to double their money in just 24 hours.
Last Monday, he saw the buy signals for AbbVie Inc. (NYSE: ABBV). By the next afternoon, the trade had netted a 100% profit.
Gentile uses a combination of five strategies to help his readers double their money. Today we are going to talk about one of them...
Timing the Market Today with MACD
One of the most popular strategies for timing the market today is moving average convergence divergence (MACD). MACD is a stock price momentum indicator consisting of two lines plotted on a stock price chart.
The two lines are the MACD line and the signal line. They allow you to see when a stock price trend is reversing so you can get in and out of trades profitably.
Don't Miss: I've promised to show my readers how to double their money in 30 days or less
The MACD line is plotted by taking the value of the 12-day exponential moving average (EMA) minus the value of the 24-day EMA. The signal line is the nine-day EMA.
Below is an example of a MACD chart. The blue line is the MACD line, and the pink line is the signal line. The green bars indicate the separation between the two lines.
There are four trends to watch in MACD. They are crossover, divergence, dramatic rise, and using the zero line as support and resistance.
Crossover has two patterns to watch for. The first pattern is bearish. It happens when the MACD falls below the signal line. When you see this signal, there are four things you can do:
- Sell shares of stock you already own
- Buy put options
- Short sell the stock
- Short sell call options
The other crossover pattern is a bullish pattern. It is formed when the MACD crosses above the signal line. This is an indicator that the stock price will rise. There are three things you can do when you see this pattern:
- Buy shares of stock
- Buy call options
- Short sell put options
The second MACD trend to watch for is divergence.
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Divergence is when the price of the security differs from the level MACD indicates it should be. It is a signal that the current trend is ending. If the stock price was rising, it is likely to start to fall soon. If the stock price has been falling, look for it to start to rise in the near future.
If the current trend is rising and you see divergence, there are four things you can do:
- Sell your current positions (either stock or call options)
- Buy put options
- Short sell the stock
- Short sell call options
If the current trend is falling and you see divergence, there are three things you can do:
- Buy stock
- Buy call options
- Short sell put options
A dramatic rise is the third MACD trend to watch for. When the MACD rises dramatically it signals that the security is overbought. The security is likely to return to normal levels shortly.
The final trend to watch for in MACD is using the zero line as support and resistance. When the MACD crosses over the zero line, it is usually a signal that the trend is reversing. If the MACD moves above the zero line it signals upward momentum. On the other hand, if it crosses under the zero line then it is signaling downward momentum.
If the MACD line crosses over the zero line it means it is a good time to consider buying the stock or call options. When the MACD line crosses under the zero line, sell your holdings, buy put options, or short the stock or call options. On the other hand, if the MACD line crosses over the zero line, you should buy the stock or call options.
The Bottom Line: Timing the market allows you to get into and out of short-term trades more profitably. MACD has four trends to help you time the market: crossover, divergence, dramatic rise, and zero line as support and resistance. Using these indicators will help you make either a bullish trade or a bearish trade to profit from the trend reversal.
Follow Money Morning on Facebook and Twitter.