Moving average convergence divergence (MACD) Technical Analysis
The moving average convergence divergence (MACD) is a popular technical indicator that traders use to identify trends and signals in the stock market. The MACD consists of two lines: the MACD line and the signal line. The MACD line is calculated by subtracting a longer-term exponential moving average (EMA) from a shorter-term EMA. The signal line is a smoothed version of the MACD line, usually a 9-period EMA of the MACD line. The MACD histogram shows the difference between the MACD line and the signal line.
One way to use the MACD is to look for crossovers between the MACD line and the signal line. A bullish crossover occurs when the MACD line crosses above the signal line, indicating a possible upward momentum in the price. A bearish crossover occurs when the MACD line crosses below the signal line, indicating a possible downward momentum in the price.
For example, let’s look at the daily chart of Apple Inc. (AAPL) from January 1, 2020 to December 31, 2020. The blue line is the MACD line, the orange line is the signal line, and the green bars are the MACD histogram.
Source: https://www.investopedia.com/terms/m/macd.asp
As you can see, there were several crossovers between the MACD line and the signal line throughout the year. Some of them were followed by significant price movements, while others were false signals or whipsaws. For instance, there was a bullish crossover in late January, which preceded a strong rally in February. However, there was also a bearish crossover in late February, which was quickly reversed by another bullish crossover in early March. This shows that the MACD is not infallible and should be used in conjunction with other indicators and analysis.
The MACD can also be used to identify divergences between the price and the indicator. A divergence occurs when the price makes a new high or low, but the MACD does not confirm it. This suggests that the price movement is losing strength and may reverse soon. A bullish divergence occurs when the price makes a lower low, but the MACD makes a higher low. A bearish divergence occurs when the price makes a higher high, but the MACD makes a lower high.
For example, let’s look at the same chart of AAPL, but zoom in on the period from September to December 2020.
As you can see, there was a bearish divergence between the price and the MACD in October and November. The price made a higher high on October 13 and November 9, but the MACD made a lower high on both occasions. This indicated that the upward momentum was weakening and that a reversal was likely. Indeed, the price declined sharply after reaching its peak on December 8.
The MACD is a versatile and widely used technical indicator that can help traders identify trends and signals in the stock market. However, like any indicator, it is not perfect and should be used with caution and confirmation from other sources.
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