Market crashes are inevitable, but they don’t have to spell disaster for your portfolio. Instead, they can present opportunities for strategic rebuilding. One of the most effective technical analysis tools for identifying market trends and entry points is the Moving Average Convergence Divergence (MACD) indicator. This article will explore how Australian retail investors can use MACD to rebuild their portfolios after a crash, providing insights into recognising trends, confirming signals, and making informed investment decisions.
Understanding MACD
MACD is a trend-following momentum indicator that helps investors identify changes in stock price direction. It consists of three key components:
- MACD Line: The difference between the 12-day and 26-day Exponential Moving Averages (EMA).
- Signal Line: Instead of the standard 9-day EMA, long-term investors can use the 200-day EMA as the signal line to better capture sustainable trends.
- Histogram: The visual representation of the difference between the MACD line and the signal line.
A positive MACD value suggests that short-term momentum is stronger than long-term momentum, while a negative MACD indicates potential downward pressure. Understanding these components can help investors spot potential entry and exit points during portfolio rebuilding.
Step 1: Assess Market Conditions Post-Crash
Before deploying MACD, it’s crucial to analyse the broader market conditions. A market crash typically leads to high volatility, and premature investments could lead to further losses. Check whether the market is forming a bottom or stabilising. This can be done by observing:
- Decreasing volatility: A more stable market environment suggests a potential recovery.
- MACD divergence: If stock prices are making new lows while MACD starts moving higher, this could indicate that selling pressure is weakening.
Step 2: Identifying Bullish MACD Signals
Once the market starts stabilising, MACD can help pinpoint favourable entry points. Look for the following bullish signals:
- MACD Line Crossing Above the 200-Day EMA
- The result is a strong signal for long-term investors.
- It suggests that the stock has regained momentum and is moving into a sustainable uptrend.
- MACD Moving Above the Zero Line
- When the MACD line moves from negative to positive territory, it confirms that the stock’s momentum has shifted upward.
- Bullish Divergence
- If the stock price makes a lower low while the MACD makes a higher low, this suggests weakening selling pressure and a potential trend reversal.
Step 3: Selecting Stocks for Portfolio Rebuilding in Australia
Using MACD effectively involves identifying Australian stocks that not only show bullish signals but also align with strong fundamentals. Consider:
- Sector Strength: Some sectors recover faster after a crash. For example, the technology and mining sectors have historically rebounded strongly on the ASX.
- Fundamental Health: Favour ASX-listed companies with strong balance sheets, positive cash flow, and competitive advantages.
- Volume Confirmation: Ensure that MACD signals are accompanied by increased trading volume, indicating stronger investor confidence.
To find and filter companies on the ASX along these axes quickly and conveniently, consider subscribing to Signal Savvy Investor.
Recent Australian Market Examples
- Commonwealth Bank of Australia (ASX: CBA)
- Following the COVID-19 market crash in 2020, CBA showed a bullish MACD crossover above the 200-day EMA in mid-2020, signalling a strong rebound.
- Investors who acted on the MACD signal saw substantial gains as CBA stock surged in the recovery period.
- Fortescue Metals Group (ASX: FMG)
- In early 2023, FMG experienced a pullback, followed by a bullish MACD divergence and a subsequent move above the 200-day EMA, indicating a potential trend reversal.
- The stock rebounded as demand for iron ore picked up, confirming the MACD signal as a valuable indicator for timing re-entries.
Step 4: Managing Risk and Timing Entries
Even with strong MACD signals, risk management is crucial. Implement these strategies:
- Use Stop-Loss Orders: Protect capital by placing stop-loss orders below recent support levels.
- Scale Into Positions: Instead of investing all at once, enter in phases to reduce exposure to volatility.
- Monitor MACD Crossovers: A sudden MACD crossover back below the 200-day EMA may indicate renewed weakness, requiring a reassessment.
Step 5: Setting Exit Strategies for Profits
A well-thought-out exit strategy ensures that profits are secured and losses minimised. Consider these approaches:
- MACD Crosses Below the 200-Day EMA: This can signal weakening momentum and serve as an early warning to reduce exposure.
- Overbought Conditions: If the stock is overextended and MACD begins to turn downward, locking in gains might be a wise decision.
- Trailing Stop-Loss Orders: These can help capture profits while allowing room for further upside movement.
Conclusion
Rebuilding a portfolio after a market crash requires patience, strategic planning, and the right tools. For Australian investors, the MACD indicator—especially when used with the 200-day EMA as a signal line—provides valuable insights into market trends and momentum shifts, allowing for more informed decisions. By combining MACD signals with strong fundamentals and proper risk management, investors can not only recover from losses but also position themselves for future growth. As always, staying disciplined and adaptable to changing market conditions is key to long-term investing success.
