The question is simple: Does the MACD reversal setup hold any predictive qualities when applied to the higher time frames?
In other words, can we spot a market reversal in SPX/SPY/SP500 using a technical analysis approach such as the MACD divergence/convergence setup?
Under the above assumptions and definitions, SPX had a total of 20 bear markets in the past 120 years. I ran the analysis with the following criteria:
|Bear Market?||Div Completed||Convergence Trigger||New ATH After Conv||New Low||Div Forms During or Slightly After Recession?|
|Y||Oct 1896||Aug 1897||Y||-||Y|
|N||Oct 1960||Jan 1961||Y||-||Y|
|N||Aug 1973||Oct 1973||N||Y||N|
|Y||Aug 1982||Aug 1982||Y||-||Y|
|Y||Oct 2002||May 2003||Y||N||Y|
|Y||Mar 2009||Jun 2009||Y||N||Y|
What is interesting to be noted here is that the only time the convergence signal failed was when it happened in a bull market and there was no recession at the time when the divergence was completed nor before that. This is the August 1973 signal.
It appears that two factors could influence the accuracy of the signal based on the data gather so far:
Since there are only two signals (October 1960 and August 1973) that occurred during a bull market we can’t really make solid conclusions. Nonetheless, the first one delivered (all time high reached after the signal). Which brings the recession filter to the top of my list.
|Convergence Trigger||Distance to ATH(%)||Time to ATH (weeks/months)||Drawdown (%)|
|Aug 1897||37.2%||165 / 38.5||-4.4%|
|Jan 1961||4.5%||4 / 1||0%|
|Oct 1973||-10% (distance to low)||7 / 1.6 (time to low)||-|
|Aug 1982||17.6%||9 / 2.1||-1.9%|
|May 2003||60.7%||214 / 50||-0.4%|
|Jun 2009||67%||199 / 46.4||-7.8%|
|Mean (excl. Oct 1973)||37.4%||118.2 / 27.6||-2.4%|
Next I assess the situations where a divergence was completed but the convergence never got triggered (no signal). Instead, the price moved lower, breaking below the second low of the divergence.
What i’m trying to figure out here is whether broken divergences have any predictive value. Does the price continue lower and how far does it go when this happens?
Figures are derived by measuring the decline from the breakout point to the lowest price reached within the given cycle.
|Div Completed||Decline After Div Break (%)|
The convergence signal tends to perform really well in identifying market bottoms in SPX/SP500.
However there are a few considerations and assumptions that should be mentioned: