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The Negative Volume Index (“NVI”) focuses on days where the volume decreases from the previous day. The premise being that the “smart money” takes positions on days when volume decreases

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MACD technical analysis MACD technical analysis stands for moving average convergence/divergence analysis of stocks.

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Friday, March 12, 2010

Percentage Volume Oscillator

The Percentage Volume Oscillator (PVO) is the percentage difference between two moving averages of volume. The indicator is calculated with the following formula:
Volume Oscillator (%) – PVO = ((Vol 12-day EMA – Vol 26-day EMA)/Vol 12-
day EMA) x 100
The 12-day exponential moving average (PVO) and 26-exponential moving average were used as examples. Typically, these can be changed to suit longer or shorter time periods. Because of its formula, the PVO has a maximum value of +100, but no minimum value. For example: if the 12-day EMA equals 2000 and the 26-day EMA equals 8000, then the PVO would equal -300 (((2000 – 8000)/2000) x 100) = -300. The absolute value is not as important as the direction or the crosses above and below the zero line.
Uses
The PVO can be used to identify periods of expanding or contracting volume in three different ways:
Centerline Crossovers: like the PPO, the PVO oscillates above and below thezero line. When PVO is positive, the shorter EMA of volume is greater than the longer EMA of volume. When PVO is negative, the shorter EMA of volume is less than the longer EMA of volume. A PVO above zero indicates that volume levels are generally above average and relatively heavy. When the PVO is below zero, volume levels are generally below average and light.
Directional Movement: General directional movement of the PVO can offer a
quick visual assessment of volume patterns. A rising PVO signals that volume levels are increasing and a falling PVO signals that volume levels are decreasing.
Moving average crossovers: The last variable in the PVO forms the signal line. For example: PVO(12,26,9) would include a 9-day EMA of PVO as well as a histogram representing the difference between the PVO and its 9-day EMA. When PVO moves above its signal line, volume levels are generally increasing. When PVO moves below its signal line, volume levels are generally decreasing.
Movements in the PVO are completely separate from price movements. As such, movements in PVO can correlated with price movements to assess the degree of buying or selling pressure. Advances combined with strength in the PVO would be considered strong. Should the PVO decline while a security’s price fell, it would indicate decreasing volume on the decline.
In the example above,

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is shown with two PVO settings: PVO (12,26,9) in the top window and PVO (5,60,1) in the bottom window. When the final variable is set at 1, as with PVO(5,60,1) there is no signal line or histogram. During August and September, the stock traded between 15 and 21, and the PVO remained mostly below zero. There was a small bounce above zero with the late August advance, but the stock remained confined to its trading range. When the stock began to advance off of its low in October, the PVO moved into positive territory with a sharp rise (green line). The advance was confirmed with expanding volume and the stock broke resistance. The breakout with expanding volume signaled exceptionally strong buying pressure.
On SharpCharts, the PVO has three variable boxes and appears in the same format as the Percentage Price Oscillator (PPO). The default setting is (12,26,9): the first variable is for the short exponential moving average (EMA) of volume, the second is for the long exponential moving average of volume and the third is for the signal line. The signal line is the EMA of the indicator itself (the PVO) and can also be made longer or shorter. The histogram (solid area above and below zero) represents the difference between the PVO and its signal line. For those who do not wish to have a trigger line or histogram, the third variable (the signal line) can be set equal to 1.
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MACD Part 2

Bearish Signals
MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals.
1.  Negative divergence
2.  Bearish moving average crossover
3.  Bearish centerline crossover
Negative Divergence
A negative divergence forms when the security advances or moves sideways and MACD declines. The negative divergence in MACD can take the form of either a lower high or a straight decline. Negative divergences are probably the least common of the three signals, but are usually the most reliable and can warn of an impending peak.
Federal Express

The FDX chart shows a negative divergence when MACD formed a lower high in May and the stock formed a higher high at the same time. This was a rather blatant negative divergence and signaled that momentum was slowing. A few days later, the stock broke the uptrend line and MACD formed a lower low.
There are two possible means of confirming a negative divergence. First, the indicator can form a lower low. This is traditional peak-and-trough analysis applied to an indicator. With the lower high and subsequent lower low, the up trend for MACD has changed from bullish to bearish. Second, a bearish moving average crossover, which is explained below, can act to confirm a negative divergence. As long as MACD is trading above its 9-day EMA or trigger line, it has not turned down and the lower high is difficult to confirm. When MACD breaks below its 9-day EMA, it signals that the short-term trend  for the indicator is weakening, and a possible interim peak has formed.
Bearish moving average crossover
The most common signal for MACD is the moving average crossover. A bearish moving average crossover occurs when MACD declines below its 9-day EMA. Not only are these signals the most common, but they also produce the most false signals. As such, moving average crossovers should be confirmed with other signals to avoid whipsaws and false readings.

Sometimes a stock can be in a strong uptrend and MACD will remain above its trigger line for a sustained period of time. In this case, it is unlikely that a negative divergence will develop. A different signal is needed to identify a potential change in momentum. This was the case with MRK in February and March. The stock advanced in a strong up trend and MACD remained above its 9-day EMA for 7 weeks. When a bearish moving
average crossover occurred, it signaled that upside momentum was slowing. This slowing momentum should have served as an alert to monitor the technical situation for further clues of weakness. Weakness was soon confirmed when the stock broke its uptrend line and MACD continued its decline and moved below zero.
Bearish centerline crossover
A bearish centerline crossover occurs when MACD moves below zero and into negative territory. This is a clear indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.

The significance of the centerline crossover will depend on the previous movements of MACD as well. If MACD is positive for many weeks, begins to trend down and then crosses into negative territory, it would be considered bearish. However, if MACD has been negative for a few months, breaks above zero and then back below, it may be seen as more of a correction. In order to judge the significance of a centerline crossover, traditional technical analysis can be applied to see if there has been a change in trend, higher high or lower low.
The UIS chart depicts a bearish centerline crossover that preceded a 25% drop in the stock that occurs just off the right edge of the chart. Although there was little time to act once this signal appeared, there were other warnings signs just prior to the dramatic drop.
1.  After the drop to trendline support , a bearish moving average crossover formed.
2.  When the stock rebounded from the drop, MACD did not even break above the trigger line, indicating weak upside momentum.
3.  The peak of the reaction rally was marked by a shooting star candlestick (blue arrow) and a gap down on increased volume (red arrows).
4.  After the gap down, the blue trendline extending up from Apr-99 was broken.
In addition to the signal mentioned above, the bearish centerline crossover occurred after MACD had been above zero for almost two months. Since 20-Sept, MACD had been weakening and momentum was slowing. The break below zero acted as the final straw of a long weakening process.
Combining Signals
As with bullish MACD signals, bearish signals can be combined to create more robust signals. In most cases, stocks fall faster than they rise. This was definitely the case with UIS and only two bearish MACD signals were present. Using momentum indicators like MACD, technical analysis can sometimes provide clues to impending weakness. While it may be impossible to predict the length and duration of the decline, being able to spot vweakness can enable traders to take a more defensive position.
After issuing a profit warning in late Feb-00, CPQ dropped from above 40 to below 25 in a few months. Without inside information, predicting the profit warning would be pretty much impossible. However, it would seem that smart money began distributing the stock before the actual warnings. Looking at the technical picture, we can spot evidence of this distribution and a serious loss of momentum.
1.  In January, a negative divergence formed in MACD.
2.  Chaikin Money Flow turned negative on January 21.
3.  Also in January, a bearish moving average crossover occurred in MACD (black arrow).
4.  The trendline extending up from October was broken on 4-Feb.
5.  A bearish centerline crossover occurred in MACD on 10-Feb (green arrow).
6.  On 16, 17 and 18-Feb, support at 41 1/2 was violated (red arrow). A full 10 days passed in which MACD was below zero and continued to decline (thin red lines). The day before the gap down, MACD was at levels not seen since October. For those waiting for a recovery in the stock, the continued decline of momentum suggested that selling pressure was increasing, and not about to decrease. Hindsight is 20/20, but with careful study of past situations, we can learn how to better read the present and prepare for the future.
Courtesy Copyright StockCharts.com .This content copyrights protected  Written by Arthur Hill.