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Make Money When the Market Burns

Written By Christian DeHaemer

Posted December 18, 2014

This morning, the price of Brent crude jumped 3.3% back above $62 on news that the Fed thinks the U.S. market is getting better.

The Russian market jumped 5.45%, and the Oslo exchange climbed 3.61%. The Nikkei 225 was up 2.32%, and the Hang Seng was up 1.09% overnight.

Was it only yesterday that the headlines were screaming about a second “Asian Contagion” like we had in 1998?

Such is life in the markets. It can be more moody than a teenaged daughter. And Mr. Market didn’t ask to be born, either.

No, the market does what it wants, not what it should. Take a look at the S&P 500…

A Moody Mess

As you can see from the bottom in October, the S&P has climbed more than 13%. That’s a hell of a move. In fact, coming off that V-shaped bottom, the market moved too far, too fast and has since rolled over.

sp500cde

All of this is fine in retrospect, but how can you know beforehand? Well, I’ll tell you one of the tricks of the trade…

There is something called the Moving Average Convergence/Divergence indicator — MACD for short.

Here’s the Investopedia definition:

A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

But you don’t really have to know any of that. Where the MACD comes in handy is that it tells you when the market will reverse.

As you can see, when the red line and blue line cross, the market changes direction. The more dramatic the cross and the farther away from the “0” line the cross is, the bigger the move.

You’ll notice that in February, the market jumped up on a big crossover at 15 below the “0” line. It moved down in July and September on moves that were 15 and 7 above, respectively.

But in October, there was a huge move on a big crossover (-30). And again in December, there was a (+27) crossover move downward.

What’s the Point?

I get that this is goofy nerd drawings that don’t matter to the average schmoe. But the truth is you can make money off of this simple MACD idea.

I’ve already showed you how it works using the biggest, most well-known market in the world: the S&P 500. And you can trade the MACD by simply timing your buys to the low crossovers or not buying at the top. That alone would add a solid percentage gain to your portfolio.

Trading Volatility

Another method of making money when the market goes crazy is to use the MACD to determine when to buy the Volatility Index (VIX).

The Volatility Index, also known as the “fear gauge,” is a forward-looking gauge of option activity on the S&P 500.  It launches when the S&P 500 goes down and vice versa.

fear1

Over the past two months in my trading service Options Trading Pit, I’ve bought call options on the VXX (a smaller, better-performing VIX tracker).

The first time in October, my readers made 261% and 140%. The second time, just last week, we banked 106.19% in just a few days.

Like I said above, the MACD is a powerful and profitable tool. When applied correctly, it allows you to make money while the rest of the market is in a panic. I encourage you to add it to your playbook.

Or you can join me at Options Trading Pit, and I can do the hard work for you. Join now.

Good hunting,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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