Technical Analysis, Using MACD

The Moving Average Convergence / Divergence (MACD) is another form of technical analysis useful to any stock trader. By understanding MACD investors can get a better idea of whether a stock they hold, are watching, etc. is overbought or oversold.

About MACD

The Moving Average Convergence / Divergence (MACD) was developed by Gerald Appel. MACD uses moving averages, creating a momentum oscillator by subtracting the longer moving average from the shorter moving average. In the end what you have is a line that crosses above and below zero without any limitations on the up or downside.

The most popular form of the MACD incorporates the 26-day and the 12-day Exponential Moving Averages (EMAs). If you look at any reputable trading programs or books, they almost always utilize the 26/12 combination. The 12 day EMA is the faster, with the 26 being the slower.

This difference plotted as a line is then compared to the 9-day EMA which acts as the trigger to symbolize a bullish or bearish crossover. A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish is when MACD moves below its 9-day EMA.

Chart Example

stock chart MACD example

With this chart of Microsoft (MSFT) we can see how the two lines interact with one another. The black line is the difference between the 12 and 26-day EMAs and the red line is the 9-day EMA.

Implying what we read above, you can see that when the 12/26 difference was above the 9-day EMA, the stock trended upwards (which was the middle of March through the middle of May). On the contrary, we can see how the stock trended downwards when the 9-day EMA was above the 12/26 difference (February - mid March).

Further Reading:

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