MDA - Market Direction Analysis

[augieboo]

LET'S TALK TA! PPO vs MACD

The PPO, (percentage price oscillator), and the MACD, (moving average convergence-divergence), are two indicators which do almost the exact same thing, but in quite significantly different ways.

First the similarities:

Both PPO and MACD compare two moving averages of price, and both use another moving average of price as a trigger line.

The standard settings for both indicators are 12-26-9, with the 12 and 26 period moving averages being compared to one another, and the 9-period being used as a trigger line. (For those who are into trigger-lines as buy and sell indicators, the main line crossing above or below the trigger line triggers buy or sell signals.)

What's the difference?

MACD takes the absolute difference between the first and second moving averages and plots that as a line, which then varies above and below zero.

PPO, on the other hand, takes the percentage difference between the first and second moving averages and plots that as a line, which then varies above and below zero.

Okay, but does that really matter, since they give the same buy/sell signals?

If your only use for the indicator is generating mechanical buy/sell signals, then this is really a difference without a distinction. Also, if you are dealing in very short time frames, it really makes no difference either.

BUT, if you are trying to figure out how BIG a rally or decline is likely to be, then this distinction is quite significant, IMDO.

Example 1: Take a look at the MACD on this three-year daily chart of the NASDAQ COMP. Notice something interesting? As the bear market progresses, each dip in the MACD automatically appears less significant than the last, simply because the index has lost so many points that the absolute difference between the 12 and 26 day moving averages is never as large as it once was.

Thus, if one were using the MACD to project the potential size of rallies, one might well think that the rally which began in September of 2001 was going to be much less significant than any previous rally since the bear began.

Now take a look at the PPO on the same chart. Interesting, no? If one were using the PPO to project the potential of the post-September 2001 rally, one could correctly see that it had the potential to be more significant than any rally since the whopper 1000+ pointer which began in April of 2000.



Here are some more examples for you to look at:







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Okay, but does this only work for indices?

Not at all!

Take a look at QCOM & TYC






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Okay, but those examples are pretty obvious. What about a closer case?

Here is a closer case, C, where PPO & MACD were close, but PPO got it "right" and MACD got it "wrong" -- or at least less right. {g}



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Does the PPO always beat the MACD?

No. For short time periods, MACD is fine. Also, in a basically sideways market, it will be harder to tell any difference. For example, here is a three year chart of BKX, which seems to be in a hugely long sideways something-er-other.




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What about the future? Any predictions?

I try not to predict, (at least publicly), because I figure I'm doing enough for Da Boyz when I lose my own money to them. I shouldn't help you lose yours as well. {NG}

With that said, I have noticed a very interesting MACD/PPO divergence in GE right about now. Both MACD and PPO seem to think the current rally in GE is potentially rather significant, but PPO seems to have the stronger opinion on the matter.



So, what do you all think?

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Disclosure: I am currently flat, waiting for Options Expiration to top out.

Disclaimer: The above is my opinion only and since it cost you nothing, you should really value it accordingly. Do not base any investment decision solely on my views or analysis -- I certainly don't so it would be rather stupid for you to do so, eh? Do your own research, learn how to make your own investment and/or trading decisions, then accept responsibility for them -- whether they end for good or ill. Finally, unless your name is ZEEV, ALWAYS use HARD/AUTOMATIC stop loss points!





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