In this article in the “Trade the News” series we will examine up trends that form in the aftermath of the news; show examples of how these trends can consolidate and reverse to the downside; and explore opportunities for trading this pattern.
Anatomy of an uptrend: what the MACD tells us
When I first began using the MACD indicator, I knew divergence and neutralization were significant and could indicate a trend reversal or continuation but I was frequently confused. I observed divergence and neutralization occurring in different time frames. Which time frame was significant? Alternately, I saw good trade setups where just a single MACD crossing indicated a powerful move without any seeming divergence or neutralization in the chart. And I was not certain when to act on a crossing of the MACD with the histogram line also called the “water line” or “zero line”.
In order to better understand MACD and its significance, I plotted a 60 minute, 15 minute, and 5 minute chart side by side of the EUR/USD currency pair and I observed these charts over a 24 hour period after the release of a major news announcement. I choose to observe MACD after the news because I knew that the MACD in all three time frame charts would be in the same position (crossed up and above the zero line) and as the uptrend progressed I would see how each chart’s MACD changed over time and over the course of the trend. I was also anticipating that this particular uptrend would not continue to the upside but rather soon reverse. I wanted to catch the moment the uptrend reached its apex to see if MACD could provide information about how an uptrend reverses.
Immediately after the news announcement as price increased, the MACD indicator in all three time frame charts was crossed up, above the zero line and showing extreme angle and separation. I began noting from this point the MACD position. Briefly, my notes were:
Illustration 1
Over this 24 hour period price rocketed up, consolidated and finally reversed to the down side. From my notes and observations, I came to the following conclusions regarding the behavior of MACD and price during post-news up trends that reverse.
Up Trends That Fail: The Up Consolidate Reverse Pattern
Assuming a significant uptrend in is place and the sixty minute, fifteen minute, and five minute MACD indicators are all crossed up, above the zero line, and showing good angle and separation:
The five minute MACD is the first to deviate when it crosses down below the signal line. This crossing occurs after a brief “micro consolidation” in the uptrend. However, far from indicating a reversal, this very first crossing of the five minute MACD typically indicates more upside potential in the uptrend.
When the fifteen minute MACD crosses down it signals the beginning of the consolidation phase.
When the sixty minute MACD crosses down the upside momentum of the initial price launch is virtually exhausted. The apex of the uptrend occurs during this phase.
After the sixty minute MACD has crossed down, if the five minute and fifteen minute MACD indicators drop below the zero line a price reversal is underway.
The above numbered observations are noted on the three charts in Illustration 2. The numbered lines in the charts are cross hairs that line up in each of the three time frame charts. For example, the line numbered “1” indicates the place in the five minute chart where the five minute MACD first crosses down. This same point in time is also shown and numbered “1” on the sixty minute and fifteen minute charts. The default MACD setting (12, 26, 9) is used for all charts.
Illustration 2
Trading the Up Consolidate Reverse Pattern
The above conclusions enabled me to create detailed trading plans for post news up trends that reverse; briefly, these are as follows.
When the five minute MACD crosses down there is still upside potential left in the trend
Assuming the sixty minute, fifteen minute, and five minute MACD indicators are all crossed up, above the zero line, and showing good angle and separation, monitor the five minute MACD for the first crossing of the MACD line below the signal line. This will occur during a brief “micro” consolidation in the uptrend usually about one hour after the news announcement. Odds favor the uptrend continuing and a favorable long entry after the five minute MACD crosses back above its signal line and holding long until the fifteen minute MACD crossing occurs, or negative divergence is seen in the five minute chart, or Stochastic is overbought in the fifteen minute chart. Below is a brief video illustrating this five minute MACD Long entry.
(click the button ABOVE to start playing, Video Only)
When the fifteen minute MACD crosses down it signals the beginning of the consolidation phase
Once the fifteen minute MACD crosses down the consolidation begins. Price most often moves in a tight range or channel during the consolidation phase offering opportunities to scalp. Look for buy opportunities when price is at the bottom of the fifteen minute Bollinger Band and the fifteen minute Stochastic is oversold. Look for sell opportunities when the fifteen minute Stochastic is overbought and price is at the top of the fifteen minute Bollinger Band (Illustration 3).
Illustration 3
It is important to note that until the sixty minute MACD crosses down the bias is still long. Additionally, these overbought/oversold points in the consolidation are more than just opportunities to capture a few pips in a short term scalping trade; they can also be early entries for the next phase: the reversal. Because the crossing down of the sixty minute MACD indicator occurs during this consolidation phase while price is “chopping around” the apex of the uptrend can be touched repeatedly offering multiple sell opportunities.
The consolidation moves into a reversal after the 60 minute MACD crosses down and the fifteen minute and five minute MACD drop below the zero line
As mentioned previously, the apex of the uptrend occurs during the consolidation phase and is usually clearly indicated by a “confluence” of indicators such as Stochastic overbought in the sixty minute and fifteen minute charts, the M1/M2 paradigm, candle patterns, upper Bollinger Band touches, etc. Once the sixty minute MACD has crossed down and the fifteen minute and five minute MACD indicators cross below the zero line the reversal is underway. (Illustration 4)
Illustration 4
In the next article in this series we will continue to examine post news up trends and the opportunities to trade these patterns.
ForexMentor members can access all the above trade setups with charts and detailed notes using these links:
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