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The assumption underlying the use of the profit alert pattern is that the trader has already entered a trade. The entry strategy need not be tied to the MACD; it could be based on trendline or price breakouts, momentum divergences, multiple moving averages and so forth. In addition, the assumption is that the trade moves in the desired direction. With these assumptions in mind, the trader needs some way to protect profits. At this point, it may be advantageous to use the MACD profit alert pattern, which warns of a potential change in trend and suggests when to take part or all of the profits.

The Alert: The MACD profit alert pattern consists of two major aspects. The first is the alert, which focuses on the space between the solid line and dotted line. In an upmove, the solid line is above the dotted line. As prices pull back, the solid line moves down toward the dotted line. At some point, the solid line pulls back close to the dotted line but does not break through; then the solid line rises again as price resumes its trend. The valley or trough left by the solid line pullback is the profit alert; the first move up of the solid line following the downturn completes the alert portion of the pattern.

Conversely, in a downward price move, the solid line is below the dotted line. At some point during the decline, price rallies, causing the solid line to move up toward the dotted line without breaking through it. Then the solid line moves back down as price resumes its downtrend. The peak or cap produced by the rally attempt and the subsequent downturn is the profit alert; the first downward move of the solid line completes the alert pattern.

In the ideal scenario, a cross of the solid line below or above the dotted line during the pullback or rally negates the profit alert pattern.

The Profit-Taking Exit: Traders, of course, are most interested in the second aspect of the pattern, the profit-taking exit (PTX). After the alert occurs during an upmove, take profit the next time that the solid line peaks or caps and turns down. During a downmove following the alert, the profit-taking exit occurs the next time the solid line forms a valley or trough and turns up. The function of the PTX is to preserve profits, not to pick exact tops or bottoms; the PTX tends to take place before an intermediate top or bottom forms. Obviously, the amount of profit depends on the entry price, the amount of slippage on exit, and commission charges. Depending on the money management method used, the trader may wish to take partial profits at the PTX or cash out completely.

The chart of Hutchinson Technology (Figure 1) illustrates the MACD profit alert pattern with both rising and falling price action. The alert is marked with an “A” and the point at which to take profits is labeled “PTX.” The PTX often precedes the crossing of the MACD solid and dotted lines by a few days. Even though profit alert patterns occur on many equities, the profit generated at the PTX is usually greater with stocks that trade above $20. In the healthcare category, Cambridge Heart (Figure 2) is a good example of a stock that produced excellent profit alerts yet yielded a loss because it traded in a very narrow price range.