Technical Analysis, Using MACD

Posted by Blain Reinkensmeyer
May 29, 2007 at 1:49 pm

Earlier today I wrote on the Relative Strength Index (RSI), and the Moving Average Convergence / Divergence (MACD) is another form of technical analysis useful to any stock trader. Following this post will be a post with a stock chart from today which we will use to make a short term movement prediction.

Simple Explanation

The Moving Average Convergence / Divergence (MACD) was developed by Gerald Appel. MACD uses moving averages, creating a momentum oscillator by substracting 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

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)!

Closing Notes

In the future I will go into greater detail with MACD and how to use bullish or bearish patterns to make money in your investment portfolios. Overall though what you need to take from this article is a simple understanding of what MACD is and how it works in a simplified manor.

(If you enjoyed this article, check out the stock education archives for more great reads.)