1. Selling below the zero line. 2. Selling above the zero line.
3. Selling when the histogram is crossing the zero line.
AC Sell below the Zero Line
Figure 6-11 shows a schematic of how the AC sell signal is created by the AC histogram's having two consecutive lower lows below the zero line. These are the AC rules for selling when the histogram is below the zero line:
1. A sell signal is created when there are two consecutive bars with lower lows from the most recent highest high (an up peak).
2. A sell stop is placed one tick below the low of the price bar, which corresponds (in the same time sequence) to the second lower low.
3. In the software, this is easy to spot because it requires at least one green bar followed by two red bars on the AC histogram.
In Figure 6-12, we see that it only takes two lower lows on the histogram to create a sell signal. This is true because we are in tune with the momentum, as evidenced by the AC histogram's being below the histogram zero line. Figure 6-13 is a similar illustration for a stock chart.
Figure 6-13 SeLL signaL when the histogram is beLow the zero Line—Tommy HiLfiger Stock.
AC Sell above the Zero Line
The rules for selling when the histogram is above the zero line are:
1. A sell signal is created when the histogram forms three bars that have consecutively lower highs following the most recent highest high (an up peak).
2. A sell stop is placed one tick below the low of the price bar that corresponds (in the same time segment) to the third lower low on the histogram.
3. In the software, this is easy to spot since it requires at least one green bar followed by three red bars on the AC histogram. This same software will also indicate the sell stop with the exact order price on the price chart itself.
We will use Figure 6—14 to demonstrate this sell signal. A change in acceleration is required, as noted on bar 1, and that is followed by two bars with lower highs. Because the histogram is above the zero line, which means that momentum is still up, it requires three red bars (bars are colored red if they are lower than the preceding histogram bar). Now, as we did in the buy section, let's examine what happens as the histogram is crossing the zero line. Notice in Figure 6-16 that there are two sell signals above the histogram's zero line. Points (A) and (B) require an upward peak followed by three lower highs. Next, let's combine this same histogram with the FedEx chart that generated these signals (Figure 6-17). The first sell signal was not followed by lower lows in price, and the momentum continued down, giving us two possible blue light specials, labeled (B) and (C). The first sell was filled at point (D). The second AO sell above the zero line signal was formed at point (E) and filled at point (F). Because of the size of this chart, you may have to refer to Figure 6-16 to see clearly that there were three down bars on the histogram. The rules for selling when the histogram is crossing the zero line from above to below (positive to negative) are:
1. A sell signal is created if the AC histogram up peak is above the zero line and crosses the line on the second or third bar after the up peak. When that happens and the current "indicator" bar in the histogram is below the zero line, you need only two lower lows (red bars). (See Figure 6-18).
2. IT IS IMPORTANT TO UNDERSTAND THAT CROSSING THE ZERO LINE IS NOT A SIGNAL ON THE AC HISTOGRAM. (Crossing the zero line is a signal only on the AO histogram.)
3. Crossing the zero line on the AC histogram only changes the number of red bars (lower lows) that you need for a sell signal. Again, the reason behind reducing the number of histogram bars after crossing the zero iine is: Momentum is now in your favor, and you want to get in or add to your position as quickly as possible.
Figure 6-18 is a schematic of how crossing the zero line affects the AC sell signal.
Rgure 6-18 SeLLing when the histogram is crossing the zero Line from above to beLow (positive to negative).
Figure 6-19 shows the highest histogram bar as "Up Peak." That bar is followed by the bar labeled "1," which is above the histogram zero line. Bar "2" is below the zero line and thus needs only a total of two lower highs after the histogram peak. In Figure 6-20, the histogram is enlarged so that it is easier to read. In Figure 6-20, you can see the effect of the AC's crossing the zero line: it cuts the number of bars needed to create a sell signal. The reasoning behind this variation is that if the histogram bar is below the histogram zero line, momentum is now down and in your favor, so get in promptly. Next, place this histogram back with the price chart to see how they fit together for profitable opportunities. In Figure 6-21, you can see that price bar (A) becomes a sell signal because the histogram has crossed the zero line, which means that the momentum is in favor of the sellers so we want to get in promptly. That now requires only two lower lows from the most recent peak. This signal was filled at point (B). Another similar signal on this chart, at point (C), was filled at point (D).
Figure 6-19 A speciaL case: When the AC histogram is crossing the zero Line— crude oiL. We have now covered the two buy signals and the two sell signals, and we have illustrated by a buy-and-sell special situation when the histogram bars are crossing the histogram zero line. For review purposes, they are all presented in Figure 6-22.