MACD and RSI together - How to profit from them

14th of September 2016 -

As I touched on the RSI and MACD in my earlier posts, I thought it may be useful for me to give you a few examples of  how to make use of them in order to Buy and Sell a Stock.
Before going to the examples please read the following GUIDELINES and RULES:

GUIDELINES -
*** MACD works only if there is a TREND, if the Stock is moving sideways (Consolidation) this will not    be useful.

*** RSI may be useful when a Stock is consolidating, and can help the MACD during a TREND.

*** There are no HOLY GRAIL 100% ACCURATE INDICATORS in the entire world, as such YOU NEED TO KNOW WHERE TO STOP YOUR LOSS. This is a must.

RULES -
*** You Buy when the RSI CROSSES OVER 50 and POINTING UP + MACD LINE CROSSES ABOVE THE SIGNAL LINE.

*** You Sell when the RSI  moves over 70 points and start pointing down OR the MACD line crosses below the Signal line, which ever happens first.

**** You Stop by selling at the previous support level.

*** YOU MUST NEVER EVER BREAK THESE RULES. ***

Now let's take a look at CFVF.N.0000 Daily Chart

As you can see the there had been 3 complete trades in CFVF from March 2016 to date. In the 1st trade it was the MACD that crossed over on the 10th March, then on  the 16th the RSI crossed over 50 points, at which point it was bought at 17.20. Then the RSI edged over 70 points and retraced down on the 15th of April, thus it was sold on that date at 25.40, giving an 8.20 profit. In this trade the stop was at the previous support of 13.80. The next trade was when the MACD crossed over on the 13th June, thereafter the RSI crossed over 50 points on the 8th of July, at which the Buy was made at 20.00. The RSI edged a little over 70 and retraced on the 27th July, triggering a sell at 24.40, giving a return of 4.40, whilst the stop was at 18.50. The 3rd and final trade was executed when the RSI crossed over 50 points on the 31st of August, MACD cross over following thereafter on the same day making the Buy at 22.00 with a stop at 21.50. the Sell was made at 32.30 on the 8th of Sept as the RSI retraced after crossing over 80 points. The return was 10.30.

2 important things to note here is that historically the RSI has moved over 80 points in CFVF, therefore when you Buy to sell in the rally there is a big chance of getting a decent return. The next thing is that when you Buy with the RSI crossing over 50 points, you are avoiding the risk of buying at sideway movements, and Buy within a trend on many occasions. 
                               

       

MACD......Another Popular Indicator in the Colombo Bourse

Indicators and Oscillators have an important relationship with Technicians World over. One of the most talked about and always used Indicators by millions of Traders is called the MACD indicator. If you break down the make up of this indicator you will notice that it is helping you to BUY and SELL an instrument, based on Exponential Moving Averages.
When Gerald Appel invented this indicator, he used the 26 day EMA, 12 day EMA and the 9 day EMA. What he did was that the 26 EMA was subtracted from the 12 EMA and the result was called the MACD line. The 9 EMA was positioned to be the signal line. Hence in this indicator you have the MACD line and the Signal line.
For Technicians and who ever interested in the MACD, only need to understand the movements of these 2 lines. The time to Buy will be when the MACD line rises above the Signal line, whilst you sell when the MACD falls below the Signal line. If you understand this that's all you need.

Apart from the Lines, we also monitor the movements of the lines through the MACD histogram in the same Chart. Histograms are little vertical or Straight Bars that rises or decline above or below a horizontal zero line.

When the MACD line rises above the Signal line the histogram bars move over zero until the MACD line falls below the Signal line, at which point the histogram bars fall below the Zero line. As the MACD line move and expand above or below the Signal Line, Histogram Bars will grow larger. When the MACD line move closer to the Signal line then the Histogram Bars become smaller. This is given in the chart below.

 Another advantage in the histogram is the expansion or the narrowing happens during the interim period. This is useful to find the higher lows and lower highs within the trend both up or down. The Chart below shows how the histogram start rising before the MACD line rises above the Zero line, helping the trader to understand the reversal with higher low closes or lower high closes.

Ceylon and Foreign Trades Plc - 17.4% target ..... .5.90 must hold

CFT.N.0000 is trending up since the lowest low of 4.70 on the 9th of March 2016. Since April it had been trading side ways along the 200 EMA within a low of 5.40 and a high of 6.60, finally breaking out and moving upto find resistance at 7.00. It is once again going through a consolidation with a low at 5.90 and a high at 7.00. There is a trading opportunity available on this counter at the present close of 6.50, with a target of 7.80. A return of 17.8%. However it is important to note that a Stop loss at 5.90 is very important, to follow this trade.

What is Consolidation - Is it GOOD or BAD

Stock markets will move ONLY  in 3 directions,UP,DOWN,and SIDE WAYS. In technicals we describe them as Trending, Reversal and Consolidation. Hence a consolidation is a side way movement. The beauty of Technical Analysis is that you can feel and expect consolidations to take place at any stage of the movement.
Therefore we know that consolidations are essential to the overall trend or reversal.
When a stock is moving up which is called Trending, we know that the buyers are willing to pay increased prices expecting to sell at a profit. But as we know the buyers can't just keep on paying higher, as such the capacity of paying higher by them tend to reduce, at that point the sellers will have to come down in price to sell. Just because the sellers are coming down to sell doesn't mean that the stock is now going to reverse and complete the up trend it is presently enjoying. In an uptrend the message that's given by the buyers is that they are not willing to just pay up, instead they are now wanting to absorb the selling at a range. This range is the consolidation phase of an up trend.
As an example let's take the present trend of Tokyo Cement Plc, in the chart given below:

On the 31st of  May 2016, TKYO.N.0000 opened at 38.80 and closed at 39.80. There onwards it went upto 44.50, and moved sideways between 44.50 and 39.50. Thereafter it continued it's ascent gradually to hit a high of 58.50 on the 26th of August 2016. The Trend paused there and is moving sideways between 58.50 and 55.50. Based on the present trend I believe that it will break above 58.50 and continue it's trending phase. If we see it closing above 57.40, then there is a very good chance of it breaking above the 58.50 high as well.

The Good side of a consolidation is that in the side way  movement the buyers are prepared to absorb the selling until such time the selling drys down. At which point the trend will resume.

But the Bad side of it is that it is very difficult to trade in the side way movement unless you are confident and experienced. Which can only be improved with patient and intelligent trial and errors. In order to master it you need to understand the support and resistant areas and closely follow the oscillator indicators such as RSI and Stochastics.

Present behaviour of several stocks suggest that they have the potential of   continuing their uptrend, and they are given below:

AEL - will consolidate between 26.50 and 25.50.
GRAN - will consolidate between 95 and 91.
CFT - will consolidate between 6.60 and 6.40.
BLUE - will consolidate between 2.20 and 1.90
PCHH - will consolidate between 1.50 and 2.00
COMB - will consolidate between 130 and 140
JKH - will consolidate between 145 and 150.

AEL - Can hit 27.50 to 28.00. Support between 25.50 and 26.50

Access Engineering Plc is the biggest Engineering/Construction Company quoted in the market. The resistance of the previous rally was around 26.90 and 27.00, which was tested in the last few days. During this trend the RSI hit a high of 83 points when the price hit 26.50, thereafter a high was established at 27.10, but the RSI did not move higher, which is technically a movement in the opposite directions, which is known as a negative divergence. This bearish signal could pave the way for an opportunity to those who intend getting into the counter. But The ideal range will be between 25.50 and 26.50, ideally close to 25.50 area. Given the positive signals we see in the Construction Sector, the idea of getting on board would not be a bad idea at all. A strategy of Averaging Down at 26.50 and covering down to 25.50 can be one approach, as the Sri Lankan Market doesn't allow short selling like Other markets. Another approach could be by allowing the RSI to retrace and getting in on the higher low, after allowing the RSI to close higher.

ASI is down but there is 1 more move up

The momentum on the ASI was not impulsive at all from the start of the present wave at 6254 points. Nevertheless it crawled up to 6603, thus giving a return of 349 points. Presently there is a visible turn and the trend has a reversal to the down side. At the top of 6603 the RSI just touched the oversold region of 70 points, whilst at the end of day of Friday the 26th of August 2016, it stood at 56.50 points. What was significant now is that the MACD has given the 1st sell signal, when it cut the signal line from above, with the 1st down bar on the histogram as well. This is bearish as we know. Also the 9sma which acts like a partner of the price line got breached from the top, which is once again a short term bearish signal. PSAR too gave the 1st dot yesterday, thus showing the strong bearish signal in the ASI.
But there is an indication that the market has another 1 more move to the up once the pullback or the correction is complete. Based on the Fib retracement line drawn from the low of 6254 to the high of 6603, the 38.2% support line sits at around 6466 points, whilst the 50% support line is around 6426 points. We can expect the ASI to retrace down to these very important support level, and thereafter resume the trend extension to reach resistance between 6710 and 6752.
Going by the values of many counters we can see that there are some popular and large companies with PE's less than 6, and these are the Counters that will take the Market to the next extension.
I expect to share those counters in the next few days.

RSI is the prominent indicator/oscillator of the Colombo Stock Market

Relative Strength Index or the RSI as we usually call it, is by far the most popular indicator/oscillator in the Colombo bourse.

RSI can be useful to understand the over-bought or over-sold condition in the Market and individual Stocks. The rule is that if the RSI moves above 70 points means that the stock is becoming overbought, whilst a drop below 30 points marks an oversold condition. The other usage of the RSI is to see whether it trends in tandem with the the market. If it does trend in the same direction as the Price, then the trend appears to be strong. But if the RSI is diverting from the trend of the stock then it is an indication of a trend reversal.

In theory this might sound fantastic, but in reality it appears to be a fiction than factual. Therefore you need to master it to reap in the benefits. However it is a useful tool to understand the pulse of the market.

Misconceptions
Many traders treat overbought and oversold scenarios as immediate trend reversals. This is more a misconception than the reality. The reason why a stock move into the overbought zone is because there are more buyers as against the sellers. Buyers do not pay the same price for the stock to move up, they pay higher, as such the RSI move up. But the prices can't always go up, and at some point the buyers get exhausted, then the Sellers take over and the stock comes down to the extent of Sellers being exhausted, thus becoming oversold. For the risk savy trader, the rising or falling RSI is a great tool to follow, with tight stop losses.

Sri Lankan Market
In the Sri Lankan Market the overbought condition becomes riskier, when the RSI goes over 80 points. Conversely if the RSI falls below 20 it is riskier for the oversold condition. The difficult task is to buy just because the RSI falls below 20 points, and sell because the RSI move over 80 points. Due to this reason you need to follow the RSI together with trend lines, moving averages, support and resistance points, and waves.

RSI and 9sma Trade Setup
Buy Rule
- RSI must cut above 50 points
- Price line must close above 9sma
Sell Rule
- Sell if the RSI moves above 70 points OR
- at a predetermine Level
Stop Rule
- Cut loss at the previous support.