One of the easiest and least risky trade setups I have found is the MACD Divergence to the short side. There are a few things that need to be in play in order to take the trade.
- MACD and Price must show a clear divergence
- Price of the stock must be higher than the previous swing high
- Bearish candlestick pattern must emerge to take the trade.
Let’s look at Medtronic (MDT) and the MACD Divergence setup trade from July 31, 2019
In the chart snippet below we can see the stock went from $99.5 up to 103.95 while the corresponding time period the MACD was at a downward slant. Also, the last candle stick was a bearish engulfing candle along with a reversal.
We set a new high, and then proceeded to take out the low for the past four days and closed very close to the low of the day.
We took a trade on this setup and purchased an August 16, 2019 $105 PUT for $2.65 while the stock was trading around the $102.84 level. MDT has earnings coming up on August 20 so the option will expire before earnings.
We are looking for a pull-back to either the $100 level or possibly all the way down to the 50-day moving average which is around the $97.5 mark. The stock continued down and closed at $101. If the setup is valid, we should see somewhere between a 75% to 150% return.
When we take short-term MACD Divergence trades, we can typically tell within the first hour or two of trading the next day if our setup will work or not.
Our mindset is that stocks take the stairs up and the elevator down. We want to catch big moves fast and get in and out.