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20 September 2009

MACD Histogram

The signals from the MACD indicator tend to lag price movements. The MACD
Histogram attempts to address this problem by plotting the distance
between MACD and its signal line. Because of this, the histogram signals trend
changes well in advance of the normal MACD signal, but is less reliable and
should be confirmed by other indicators.

Only trade with Histogram signals when the market is trending.

The MACD Histogram can also be used to track longer cycles, using weekly or monthly data.

Trading Signals

Use Stop Losses with all trades.

Ranging Markets

Signals are stronger if

There is a bullish divergence on the Histogram; or

The signal occurs far from the zero line.

Disregard signals close to the zero line unless confirmed by a divergence.

Go long when the MACD Histogram turns up below zero.

Close the position when there is a signal to go short.

Go short when MACD Histogram turns down above zero.

Close the position when there is a signal to go long.

Trending Markets

Only trade in the direction of the trend. Signals close to the zero line are accepted provided the
trend is intact.

Go long when the MACD Histogram turns up below zero.

Go short when MACD Histogram turns down above zero.

Use a trend indicator, such as a moving average, to exit from trends.

Intel Corporation is shown with MACD histogram and 21-day exponential moving average.
Trendlines show divergences.

1
Mouse over chart captions to display trading signals.

Price is ranging - indicated by the flat MA. Go long [L] when the histogram turns up (far from
the zero line). Place a stop below the recent Low.

Go short [S] as the histogram turns down (far from the zero line). Place a stop above the recent
High.

Go long [L] - the histogram turns up and is reinforced by a bullish divergence. Place a stop
below the recent Low.

Go short [S] as the histogram turns down - reinforced by a bearish divergence. Place a stop
above the recent High.

Ignore the signal as it is too close to the zero line.

Go long [L] as the histogram turns up when well below zero. Place a stop below the recent Low.

A further signal to go short [S]. Place a stop above the recent High.

Go long [L] - the histogram has turned up and is reinforced by a bullish divergence. Price has
broken clear of the trading range and the MA is rising - exit [X] when price closes below
the MA.

Setup

The default settings are:

Slow moving average - 26 days

Fast moving average - 12 days

Signal line - 9 day moving average of the difference between fast and slow.

2
All moving averages are exponential.

The MACD histogram is calculated as the MACD indicator minus the signal line. Observe
that:

When MACD is above the signal line then the histogram is positive.

When MACD is below the signal line then the histogram is negative.

When the gap between the MACD and its signal line is widest then the histogram registers its
highest (or lowest) readings.

The histogram is at zero when MACD and the signal line cross (the signal for trading with
theMACD).

The histogram turns back towards the zero line when MACD and the signal line converge, well
in advance of them actually crossing.

The MACD Histogram is more suited to traders than investors: signals are generated
a lot earlier in the trend but are less reliable as a consequence. It is essential
that stop losses are employed on every trade and adjusted over time to protect
profits

Set up the MACD so that the first moving average is half the length of the cycle being
tracked. The second moving average should be half the length of the first and the third
(signal line) moving average can be varied according to the sensitivity required.

Dr Alexander Elder, in Trading for a Living, uses an MACD Histogram as the first screen in his
Triple Screen Trading system. Weekly moving averages are used, set at 26, 12 and 9
weeks. WeeklyMACD readings are more reliable but there is a lag effect (signals only occur
once a week). Alternatively, use an equivalent daily MACD (e.g. 130 days, 60 days and 45
days) with a filter (e.g. 3 consecutive bars) or a signal line created with Indicator
Smoothing.

EXAMPLE

FedEx is shown with 150-day exponential moving average and MACD Histogram (100-
day, 50-day and 30-day moving averages) and 9-day exponential signal line ( optional
indicator smoothing).

The histogram crosses to above the signal line at [1], signaling that the market can now be
traded long.

Conditions remain favorable until [8], when the histogram crosses to below the signal line.
Place a sell-stop below the Low of the signal day. We are stopped out the next day.

Entry is timed using a short-term oscillator and trailing buy and sell stops:

3
FedEx is shown below with 150-day exponential moving average and 9-
day Stochastic %K and %D.

Entry is timed using a short-term oscillator and trailing buy and sell stops:

FedEx is shown below with 150-day exponential moving average and 9-


day Stochastic %K and %D.

The MACD histogram signals [1] that conditions are favorable for long trades.

%K crosses below the oversold level at [2]. Place a buy-stop above the day's High.

The stop is not activated and the day has a lower High. Move the buy-stop to just above the
High.

Price moves up stopping us in. Place a stop loss below the Low of day [3].

We are stopped out when price falls below the stop level on day [5]. The same day provides us
with a signal to go long - place a buy-stop above the High of day [5].

Price moves lower - move the buy-stop down to above the High on day [6].

Price moves higher, stopping us in. Place a stop loss below the Low of day [6].

4
The long position is closed when MACD histogram closes below the signal line at [8] - refer to
the first chart. Place a sell-stop below the Low of the signal day. We are stopped out the
next day.

Formula

To calculate the MACD Histogram:

Microsoft Corporation is plotted with MACD, MACD signal line and MACD Histogram.

The MACD histogram is calculated as the MACD indicator minus the signal line. Observe that:

• When MACD is above the signal line then the histogram is positive.
• When MACD is below the signal line then the histogram is negative.
• When the gap between the MACD and its signal line is widest then the histogram registers
its highest (or lowest) readings.
• The histogram is at zero when MACD and the signal line cross (the signal for trading with
theMACD).
• The histogram turns back towards the zero line when MACD and the signal line converge,
well in advance of them actually crossing.

My Toolbox : Dr Alexander Elder


My approach is based on the Triple Screen trading system which I developed
in the 1980s and continue to improve to this day. Since every market
can be analyzed in several timeframes, Triple Screen insists that you
begin by defining your favorite timeframe in which you like to work, such
as daily, hourly, or weekly chart. Once you know what your favorite is,
do not look at it! You must first go to the timeframe one order of magnitude
higher, make your strategic decision there, and return to your

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favorite timeframe only to make a tactical decision—where to buy or
sell—and then trade only in the direction of the longer timeframe.
Since my favorite timeframe tends to be the daily, I use weekly charts
to make my strategic decisions, and return to dailies to implement them.
The weekly and daily charts are my first two screens. The third screen is
the entry method, for which you can either use an intraday chart or simply
place an order using a daily chart.

MOVING AVERAGES
Price is a consensus of value at the moment of a trade. A moving average
(MA) reflects an average consensus of value in its time window. If
price is a snapshot, a moving average is a composite photograph. It provides
two important messages to traders. First, its slope identifies the
direction of change in the public’s mood. A rising moving average
reflects growing optimism (bullish), while a falling MA reflects growing
pessimism (bearish).
Another important role of the MA is differentiating between what I call
“value trades” and “greater fool theory” trades. If you buy near the moving
average, you’re buying value. A person who buys well above the
moving average is in effect saying—”I’m a fool, I’m overpaying, but I hope
to meet a greater fool down the road.” There are very few fools in the
financial markets, and a person who keeps buying above value is not
likely to win in the long run. He may get lucky once in a while, but buying
near value is a much more sensible strategy. I like using two EMAs on
my charts, one showing a longer-term, and another a shorter-term, consensus
of value. I call the area between them “the value zone.” There are
several types of moving averages, but I always use exponential ones. EMAs
are more sensitive to incoming prices and less sensitive to old prices.

ENVELOPES OR CHANNELS
One of the very few scientifically proven facts about the markets is that
prices oscillate above and below value. You could say that markets are
manic-depressive—rising too high and falling too low, only to swing back
to the normalcy of the value zone.
There are several types of channels, and my favorite is a straight envelope—
the lines above and below the EMA, both parallel to it. A welldrawn
channel fits like a good shirt, covering the body of prices, with
only the most extreme prices—the neck and the wrists—sticking out.
Amateurs love to buy breakouts, but professionals tend to look for buying
opportunities near the lower channel line and shorting opportunities
near the upper channel line.
Some traders like to use standard deviation channels, often called
Bollinger Bands, which expand and contract in response to market
volatility. They are only useful for options traders because volatility is a
key factor in option pricing. If you trade stocks, futures, or forex, you are
better off with straight envelopes.

MACD LINES AND MACD-HISTOGRAM


Moving Average Convergence-Divergence (MACD) is an indicator whose
fast line represents the short-term consensus of value, and the slow line
the long-term consensus. When the fast line rises above the slow line, it
shows that bulls are dominant, and when the fast line is below the slow
line, the bears are in charge.
MACD-Histogram measures the power of bulls and bears by tracking
the difference between the two MACD lines. When their spread increases,

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it shows that the dominant market group is becoming stronger—it is a
good time to trade in that direction. Divergences between peaks and bottoms
of MACD-Histogram and price are among the strongest signals in
technical analysis.
MACD-Lines and MACD-Histogram are derived from three exponential
moving averages of closing prices. Their settings—12, 26, and 9—have
migrated into trading software and become default settings in many packages.
In writing my books, I used those settings to illustrate this indicator.
What settings should you use? If you want to use the same ones as
everyone else, use 12, 26, and 9 because the crowd is basically lazy and
uses the default values. You can also choose settings that are a little faster
or a little slower. Think about it and experiment with the values, or use
the defaults.

FORCE INDEX
Everybody watches prices, but it is volume that moves them. Volume reflects
the intensity of traders’ commitment, the heat of their exuberance,
the depth of their fear. Instead of looking at a plain plot of volume, I use
Force Index, which links volume with price changes. Divergences between
Force Index and prices tell me when a trend is becoming weak
and ready to reverse. By contrast, new highs of Force Index tell me that
the trend is strong and likely to continue.

THE IMPULSE SYSTEM


This system identifies bullish and bearish phases in any market or timeframe
by combining two indicators. The slope of the fast moving average identifies
the inertia of the market, while the slope of MACD-Histogram
identifies the push of the bulls or bears. The Impulse system gives a buy
signal when both the EMA and MACD-Histogram rise, and a sell signal
when both decline. When the two indicators get in gear, they mark especially
bullish or bearish periods. Just as importantly, the Impulse shows
when bulls or bears start slipping, and a trend starts growing weaker.
One of my Traders’ Camps graduates, a brilliant programmer named
John Bruns, programmed the Impulse system for several popular software
packages, coloring each bar in accordance with the Impulse system.
When the EMA and MACD-Histogram rise at the same time, the market
is in gear to the upside and the bar turns green. When both fall, bears are
in control and the bar is red. When the two indicators point in opposite
directions the bar is blue.

The Impulse The slope of The slope of The trading


System EMA MACD-Histogram message
Green Up Up Long or stand aside; no shorting
Red Down Down Short or stand aside; no buying
Blue Up Down Either long or short
Blue Down Up Either long or short

The Impulse system works best as a censorship method. When the


Impulse is green, you may buy or stand aside but absolutely no shorting
is permitted. When the Impulse is red, you may go short or stand aside
but buying is prohibited. I wait for the Impulse system to go “off green”
before shorting and “off red” before buying.
Some programs do not allow users to change the color of their bars on
the basis of conditional formatting, but you can still identify green or red
Impulse by noticing the slope of the EMA and MACD-Histogram.

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Adapted from Entries & Exits by Dr. Alexander Elder,
John Wiley & Sons, Inc., 2006
……………………………………………………………………….

Author(s): “Understanding MACD”

Gerald Appel
Click here to view other Titles by this author.

Gerald Appel is a world famous author and lecturer. A frequent guest on television and radio,
he has appeared on Wall Street Week with Louis Ruykeyser and his articles and/or articles
about him have appeared in Money Magazine, Barron’s, Technical Analysis of Stocks and
Commodities Magazine, Stocks Futures and Options Magazine, Wealth Magazine, the New
York Times, Forbes, Kiplinger’s Magazine, and elsewhere. He is the founder of Signalert
Corporation, an investment advisory firm that manages more than $300 million in client
assets and is the author of numerous books and articles regarding investment strategies,
including Technical Analysis: Power Tools for the Active Investor (Financial Times
Prentice Hall, 2005).

Edward D. Dobson
Click here to view other Titles by this author.

Edward Dobson was born in California and raised in South Carolina. At age 12, his father
instilled in him an interest for investing in stocks. This became a life long passion, which
came to encompass trading in securities, options and futures.

After college and military duty, he was a broker with Smith Barney and Paine Webber for 23
years, specializing in options and futures. In 1992, he left the brokerage business to devote
full time to his publishing business, Traders Press (founded in 1975), and to trading. He is
currently an active trader and still active in his business.

Edward Dobson is the president and sole owner of Traders Press, Inc. You can read more about
him in the History of Traders Press.

Synopsis:

8
Are You an MACD Expert Yet? If not, you can be soon! Our latest publication is the definitive
reference on this widely followed yet little understood technical indicator. Order your copy
today!

Description:

Click here for the E-Book Edition : “Understanding MACD”

MACD (Moving Average Convergence-Divergence) is a highly effective and practical trend-


following indicator which is widely available on most technical analysis software programs.
Traders and investors with this indicator at their disposal would be well advised to learn as
much as they can about it and how to use it to improve their trade timing and selection.

This comprehensive guide to MACD is a one-of-a-kind one-stop reference that will prove a
valuable addition to your trading library. It includes a bullet point summary overview of
MACD, a detailed bibliography detailing all known references and articles relating to
MACD, with annotation showing unique points covered in each source, and a major
research report on MACD written by and originally published by Gerald Appel (and
priced at $50 for this report alone). This report, written by the originator of this indicator,
is the most definitive and in-depth material available on MACD. It alone is worth far more
than the modest price of this booklet.

Publisher’s Foreword

I first learned about MACD (Moving Average Convergence-Divergence) in the early 1980’s,
shortly after Gerald Appel published his groundbreaking research report which
“revealed” this new technical indicator. In 1986, he updated and expanded his original
report, and shared with the reader how he used and interpreted it in his own market
analysis. This updated report, reproduced in its entirety, is the heart of this work, which is
intended to give the reader a basic understanding and knowledge of MACD and how to use
it effectively in market analysis and timing. It is my belief that the most effective way to
achieve this goal is to hear it straight from the “master” on the subject.

The idea for this book came about years ago one night when my old friend Gerald and I were
having dinner with our mutual friend Alexander Elder in Chicago. It has been a long time
in the making since then. Originally, Gerald felt that the original manuscript and charts
would need to be updated with current examples and commentary. He didn’t even have a
copy of the report, which had gone out of print and was no longer available. After a
diligent search I was able to locate an old used copy, which was forwarded to him to be
updated and revised. Surprisingly, after looking it over closely (this being some 20 years
after it was written), he advised that he felt it was “OK” as it was, and needed no updating.
I feel that this attests to the fact that markets, over time, no not really “change”, and some
indicators and principles stand the “test of time” and are just as valid today as they were
decades ago. In terms familiar to systems developers, they are “robust”.My special thanks
to Shelley Mitchell, whose painstaking research and diligent effort produced the listing of
articles and annotated bibliography which add a valuable dimension to this work.

It is my hope that this reprinted material, along with the annotated bibliography of articles and
references and a few brief comments of my own, will prove helpful to you in your pursuit
of trading excellence. Introduction There has long been a need for this booklet. MACD
(Moving Average Convergence-Divergence) has long been one of the most popular and

9
widely available technical indicators since it was developed by Gerald Appel in the late
1970’s. However, since Appel’s last published research on the subject, published in 1986,
went of out print and was no longer available, there has been no work solely dedicated to
this topic. There are a number of excellent books which contain discussion and explanation
of MACD, but only in passing and not in depth. Research of all past literature dealing with
MACD shows that Appel’s own in-depth work on the subject is the best resource for
learning and mastering the use of this indicator….thus, this work is reprinted herein in its
entirety. As explained in the Foreword, though this material is over twenty years old, it is
still as relevant and applicable today as when it was originally written.

Those interested in furthering their knowledge of MACD are encouraged to take special note
of the articles listed herein, and of the references in other works in the bibliography. The
most notable of these works is Appel’s own “Technical Analysis: Power Tools for
Investors”, which has a major section and treatment of MACD, and which was recently
published in 2005. This book is a valuable reference and resource for serious traders and
investors.

Of all the many technical indicators and studies available today in technical analysis software,
it is my belief that MACD is one of the most helpful and reliable. An old acquaintance of
mine, who spent literally thousands of hours over a period of years studying various
technical indicators, eventually came to the conclusion that the only two indicators truly
worth using were ADX and MACD, applied over multiple time frames simultaneously. The
MACD histogram, which shows the difference between the two MACD lines, was preferred
over the two lines themselves. When this histogram crosses the zero line in either direction,
it shows a crossing of the two lines. When the histogram reading peaks and turns up or
down, indicating that the differential between the lines has run out of momentum and
begun to decrease, is an early signal that occurs well before an actual crossing of the lines.
My acquaintance used this occurrence as one of the main components of a trading
methodology (coupled with ADX readings).

I first became aware of the use of the MACD histogram in the late 1980’s, when my friend Alex
Elder used and discussed it extensively in a market letter he published at that time.
Another reference I highly recommend for discussion of MACD and the Histogram is the
relevant section in Elder’s classic “Trading for a Living”, one of the best and most helpful
trading books ever written, in my opinion.

Table of Contents:

Publisher’s Foreword

Introduction

Key Points

MACD Report

The Basic Structure of MACD

Introducing the Signal Line

The Basic Buy and Sell Signals

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Using Divergences to Recognize the Most Reliable Signals

Comparing MACD to a Price Momentum Oscillator

Comparing MACD to the Relative Strength Indicator

Combining Two MACD Combinations for More Accurate Signals

MACD During a Strongly Uptrending Period

MACD During a Strongly Downtrending Period

Stop Losses for Unsuccessful Trades

Using Trendlines to Confirm Signals

Long Term MACD Signals

Using Monthly MACD

MACD As A Day Trading Tool

Using Time Cycles with MACD

When MACD Does Not Provide Timely Signals

Amazing Ability of MACD to Catch the Ends of Significant Declines

MACD and the 5-Minute Tick Chart

MACD and the 71 Day Market Cycle

Shifting Your Sell Parameters Because of Divergence

A Difficult Climate for MACD

Computing and Maintaining Exponential Moving Averages

Summary of MACD Procedures

Sell Procedures

Understanding MACD by Gerald Appel and Edward Dobson

Synopsis:

Are You an MACD Expert Yet? If not, you can be soon! This is the definitive
reference on this widely followed yet little understood technical indicator.

11
Description:

MACD (Moving Average Convergence-Divergence) is a highly effective and


practical trend-following indicator which is widely available on most technical
analysis software programs. Traders and investors with this indicator at their
disposal would be well advised to learn as much as they can about it and how to
use it to improve their trade timing and selection.

This comprehensive guide to MACD is a one-of-a-kind one-stop reference that


will prove a valuable addition your trading library. It includes a bullet point
summary overview of MACD, a detailed bibliography detailing all known
references and articles relating to MACD, with annotation showing unique points
covered in each source, and a major research report on MACD written by and
originally published by Gerald Appel (and priced at $50 for this report alone).
This report, written by the originator of this indicator, is the most definitive and
in-depth material available on MACD. It alone is worth far more than the modest
price of this booklet.

Publisher’s Foreword

I first learned about MACD (Moving Average Convergence-Divergence) in the


early 1980’s, shortly after Gerald Appel published his groundbreaking research
report which “revealed” this new technical indicator. In 1986, he updated and
expanded his original report, and shared with the reader how he used and
interpreted it in his own market analysis. This updated report, reproduced in its
entirety, is the heart of this work, which is intended to give the reader a basic
understanding and knowledge of MACD and how to use it effectively in market
analysis and timing. It is my belief that the most effective way to achieve this goal
is to hear it straight from the “master” on the subject.

The idea for this book came about years ago one night when my old friend Gerald
and I were having dinner with our mutual friend Alex Elder in Chicago. It has
been a long time in the making since then. Originally, Gerald felt that the original
manuscript and charts would need to be updated with current examples and
commentary. He didn’t even have a copy of the report, which had gone out of
print and was no longer available. After a diligent search I was able to locate an
old used copy, which was forwarded to him to be updated and revised.
Surprisingly, after looking it over closely (this being some 20 years after it was
written), he advised that he felt it was “OK” as it was, and needed no updating. I
feel that this attests to the fact that markets, over time, no not really “change”,
and some indicators and principles stand the “test of time” and are just as valid
today as they were decades ago. In terms familiar to systems developers, they
are “robust”.My special thanks to Shelley Mitchell, whose painstaking research
and diligent effort produced the listing of articles and annotated bibliography
which add a valuable dimension to this work.

It is my hope that this reprinted material, along with the annotated bibliography
of articles and references and a few brief comments of my own, will prove helpful
to you in your pursuit of trading excellence. Introduction There has long been a
need for this booklet. MACD (Moving Average Convergence-Divergence has long
been one of the most popular and widely available technical indicators since it

12
was developed by Gerald Appel in the late 1970’s. However, since Appel’s last
published research on the subject, published in 1986, went of out print and was
no longer available, there has been no work solely dedicated to this topic. There
are a number of excellent books which contain discussion and explanation of
MACD, but only in passing and not in depth. Research of all past literature
dealing with MACD shows that Appel’s own in-depth work on the subject is the
best resource for learning and mastering the use of this indicator….thus, this
work is reprinted herein in its entirety. As explained in the Foreword, though this
material is over twenty years old, it is still as relevant and applicable today as
when it was originally written.

Those interested in furthering their knowledge of MACD are encouraged to take


special note of the articles listed herein, and of the references in other works in
the bibliography. The most notable of these works is Appel’s own “Technical
Analysis: Power Tools for Investors”, which has a major section and treatment of
MACD, and which was recently published in 2005. This book is a valuable
reference and resource for serious traders and investors.

Of all the many technical indicators and studies available today in technical
analysis software, it is my belief that MACD is one of the most helpful and
reliable. An old acquaintance of mine, who spent literally thousands of hours
over a period of years studying various technical indicators, eventually came to
the conclusion that the only two indicators truly worth using were ADX and
MACD, applied over multiple time frames simultaneously. The MACD histogram,
which shows the difference between the two MACD lines, was preferred over the
two lines themselves. When this histogram crosses the zero line in either
direction, it shows a crossing of the two lines. When the histogram reading peaks
and turns up or down, indicating that the differential between the lines has run
out of momentum and begun to decrease, is an early signal that occurs well
before an actual crossing of the lines. My acquaintance used this occurrence as
one of the main components of a trading methodology (coupled with ADX
readings). I first became aware of the use of the MACD histogram in the late
1980’s, when my friend Alex Elder used and discussed it extensively in a market
letter he published at that time. Another reference I highly recommend for
discussion of MACD and the Histogram is the relevant section in Elder’s classic
“Trading for a Living”, one of the best and most helpful trading books ever
written, in my opinion.

Paperback: 45 pages

Publisher: Traders Press, Inc. (2008)

MACD Oscillator and MACD Histogram

The MACD Oscillator is the difference between a short term and a long term moving averages.

13
The three parameters are the number of periods for the short term moving average, long term
moving average and the moving average of the resulting MACD Oscillator.

This shows the convergence and divergence of the 2 moving averages and is plotted as the red
line around the zero point. The MACD is presented with its moving average as the green
line. The MACD oscillator is available in the Custom Charts section of our site.

The Exponential MACD Oscillator uses the exponential moving averages in the calculations
instead of the regular moving averages.

If you put a zero in the third parameter box, the program will not calculate the moving average
of the MACD and only the red line will appear, and the resulting MACD is conventionally
presented as a histogram for clarity.

When the MACD Oscillator is above the zero line, conventional wisdom interprets this as a
bullish signal, and conversely, when the histogram is below the zero line this is interpreted
as a bearish signal. The green line being above the red line reinforces a bullish signal, and
the red line below the green line reinforces a bearish signal. Other interpretations use
crossovers between the red and green lines as market timing signals if the resulting
direction of both lines is the same. Going up is bullish, going down is bearish.

MACD Histogram

This is not the same as the Histogram generated by the MACD Oscillator when the third
parameter is set to zero. The MACD Histogram requires all three parameters, set the same
way as the MACD study above. It only draws one line, which is presented as a histogram
and is the difference between the MACD and it's moving average. It is plotted around the
zero point.

When the Histogram is above the zero line, conventional wisdom interprets this as a bullish
signal, and conversely, when the histogram is below the zero line this is interpreted as a
bearish market.

Description

The Moving Average Convergence Divergence (usually known by the acronym MACD) is a
momentum indicator, that was developed by Gerald Appel in the 1960s. The MACD
compares two exponential moving averages, and displays the difference between the
moving averages as a single line, with positive and negative values, above and below a zero
line (an oscillator). The MACD is displayed on its own chart, separate from the price bars,
and is the lower section in the example chart (full size chart).

Calculation

Description : The MACD (MACD) is the difference between short term (EMAS) and long term
(EMAL) exponential moving averages, and is often used with a signal line that is an
exponential moving average of the MACD (EMAMACD).

Calculation :
EMAS = EMASn-1 + ((2 / (n + 1)) * (Pn - EMASn-1))
EMAL = EMALn-1 + ((2 / (n + 1)) * (Pn - EMALn-1))

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MACD = EMAS - EMAL
EMAMACD = EMAMACDn-1 + ((2 / (n + 1)) * (Pn - EMAMACDn-1))

Trading Use

As the MACD is a momentum indicator, it shows positive momentum when it is above the zero
line, and negative momentum when it is below the zero line (similar to the Commodity
Channel Index (CCI)). There are many different ways of interpreting the MACD during
trading, but the most popular ways (not necessarily the most profitable) include the
MACD crossing its signal line and the MACD crossing the zero line. The MACD can also
be used as a divergence indicator, with long entries signaled by bullish divergence, and
short entries signaled by bearish divergence.

In last week's StreetAuthority Swing Trader we discussed the importance of MACD. You
saw that an important component of a successful trading system is to combine weekly and
daily MACD signals. You can do so by taking the daily signals that are in accordance with
both the weekly MACD and the overall trend (as measured by the 30- or 40-week moving
average).

MACD can be made even more useful by incorporating a related indicator -- the MACD
histogram. Thomas Aspray described the histogram in 1986. Like MACD, it oscillates
around a zero line. But while MACD is an indicator based on moving averages, the

15
histogram is an indicator of an indicator -- the MACD itself.

What the histogram shows in graphic form is the difference between the main MACD line
(the 12-26 line) and the nine-period trigger line. This difference is then plotted on a scale to
form a histogram, defined as a series of vertical lines. The higher the lines "grow" above the
histogram's zero line, the stronger the price momentum and the more bullish the trend. The
further the lines decline below the zero line, the stronger the negative the trend and the
more downside pressure there is. When the MACD indicator itself issues a buy or sell
signal, then the histogram is always at its own zero line.

Although you can derive the same information by eyeballing the underlying MACD indicator,
the histogram does the job for you, allowing you to spend your full energy on technical
analysis.

There are two important ways to use the histogram to generate trading signals. First, the
histogram tells you when momentum is beginning to wane. Since a key principle of
technical analysis is that momentum precedes price, the histogram gives the technician an
early warning that prices may be about to reverse course.

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The chart above is the weekly chart of the S&P 500 index with the 40, 12 and 26-week
moving averages shown, as well as MACD and the histogram. First, note that in one year of
trading, there have been only three crosses of this histogram above and below the zero
line, reflecting the three underlying MACD signals in this time frame. Clearly, these signals
are infrequent enough to be carefully noted.

Second, note the negative momentum peak in mid-July and the positive momentum peak in
late December. As a trader, one should avoid taking a short position at the peak of negative
momentum and a long position at the peak of positive momentum.

The histogram is thus an early warning indicator, telling the trader that a momentum peak
has been reached and that a peak in price may not be far away. Given the overall
downtrend as measured by the 40-week moving average, going long at the momentum
peak would be a serious error and could prove costly.

The histogram also gives important divergence signals. Negative divergence occurs when
prices rally to a new high or back to approximately the same level and the histogram is
lower. Positive divergence occurs when prices reach a lower low, but the MACD histogram
is at a higher level.

The best example of histogram divergence on this chart can be seen when comparing the
July and October lows, both of which occurred at around S&P 775. Note that the first low
occurred at about –20 on the histogram scale, whereas the second low was very close to
the 0 line. The trader who perceived this signal would be on the alert for a price reversal.
When the actual MACD crossover occurred in early October, the opportunity could have
been acted on without hesitation.

The MACD histogram combines well with MACD to give you a trend-following and
momentum indicator all in one. It is an indispensable tool of technical analysis. Next week
we will explore the idea of MACD divergence in more detail.

The MACD Histogram gives depth and dimension to what the MACD lines are telling you.

The MACD Histogram measures the difference between the MACD fast line (in red) and the MACD signal line
(in blue). If the fast line is above the signal line, the MACD Histogram is positive, and the bars are drawn
above the centerline. If the fast line is below the signal line, MACD Histogram is negative, and the bars are
drawn below the centerline.

Chrysler Corp (C)

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The MACD Histogram indicator graph is the second from the bottom. The MACD indicator graph is right
above that one. The two are used in conjunction with one another.

Do you see that smallish hump above the centerline on Chrysler's MACD Histogram indicator graph that
occurs in mid-April? That's a bearish development. Why? Because the hump is smaller than the preceding
hump above the centerline, yet prices are higher. In other words, there is a divergence between the events on
the price graph and the Histogram. On the price graph we are seeing new highs, yet on the MACD Histogram,
quite a small hump is being traced.

Does this mean that mid-April's short green bar is bogus? Not entirely. The green bar was born when there
was quite a bit of up volume, as indicated in blue on the Volume graph (which in this case was treacherously
deceiving). You simply can't be sure what is going to happen next when dealing with the right edge of any
graph, and the bullish green bar above the price graph does terminate correctly after the retracement begins.

When MACD Histogram starts to tick down right after a bullish green bar is born, that's the time to watch
carefully and get ready to bail. It means that a new leg on an uptrend might be failing.

Moving Average Convergence/Divergence (MACD)

Introduction

Developed by Gerald Appel, Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable
indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following
characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average

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from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper
or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply.
MACD Formula
The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential
Moving Averages (EMAs). This is the formula that is used in many popular technical analysis programs,
including SharpCharts, and quoted in most technical analysis books on the subject. Appel and others have since tinkered
with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter
moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a
slower indicator, less prone to whipsaws. For our purposes in this article, the traditional 12/26 MACD will be used for
explanations. Later in the indicator series, we will address the use of different moving averages in calculating MACD.
Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing
prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line.
A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish crossover occurs when MACD moves
below its 9-day EMA. The Merrill Lynch (MER) chart below shows the 12-day EMA (thin blue line) with the 26-day EMA
(thin red line) overlaid the price plot. MACD appears in the box below as the thick black line and its 9-day EMA is the thin
blue line. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when
MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

What Does MACD Do?


MACD measures the difference between two Exponential Moving Averages (EMAs). A positive MACD indicates that the
12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-
day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This
indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving
average. Positive momentum is increasing, indicating a bullish period for the price plot. If MACD is negative and declining
further, then the negative gap between the faster moving average (blue) and the slower moving average (red) is
expanding. Downward momentum is accelerating, indicating a bearish period of trading. MACD centerline crossovers
occur when the faster moving average crosses the slower moving average.

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This Merrill Lynch (MER) chart shows MACD as a solid black line, and its 9-day EMA as the thin blue line. Even though
moving averages are lagging indicators, notice that MACD moves faster than the moving averages. In this example,
MACD provided a few good trading signals as well:
1. In March and April, MACD turned down ahead of both moving averages, and formed a negative divergence
ahead of the price peak.
2. In May and June, MACD began to strengthen and make higher Lows while both moving averages continued to
make lower Lows.
3. Finally, MACD formed a positive divergence in October while both moving averages recorded new Lows.
MACD Bullish Signals
MACD generates bullish signals from three main sources:

1. Positive Divergence
2. Bullish Moving Average Crossover
3. Bullish Centerline Crossover
Positive Divergence

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A Positive Divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower
reaction low. MACD can either form as a series of higher Lows or a second Low that is higher than the previous Low.
Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the
biggest moves.

Bullish Moving Average Crossover

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A Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA, or trigger line. Bullish Moving
Average Crossovers are probably the most common signals and as such are the least reliable. If not used in conjunction
with other technical analysis tools, these crossovers can lead to whipsaws and many false signals. Bullish Moving
Average Crossovers are used occasionally to confirm a positive divergence. A positive divergence can be considered
valid when a Bullish Moving Average Crossover occurs after the MACD Line makes its second "higher Low".
Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An
example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days. The
buy signal would then commence at the end of the third day.

Bullish Centerline Crossover

A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a clear
indication that momentum has changed from negative to positive, or from bearish to bullish. After a Positive Divergence
and Bullish Centerline Crossover, the Bullish Centerline Crossover can act as a confirmation signal. Of the three signals,
moving average crossover are probably the second most common signals.

Using a Combination of Signals

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Even though some traders may use only one of the above signals to form a buy or a sell signal, using a combination can
generate more robust signals. In the Halliburton (HAL) example, all three bullish signals were present and the stock still
advanced another 20%. The stock formed a lower Low at the end of February, but MACD formed a higher Low, thus
creating a potential Positive Divergence. MACD then formed a Bullish Moving Average Crossover by moving above its 9-
day EMA. And finally, MACD traded above zero to form a Bullish Centerline Crossover. At the time of the Bullish
Centerline Crossover, the stock was trading at 32 1/4 and went above 40 immediately after that. In August, the stock
traded above 50.

Bearish Signals
MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals:

1. Negative Divergence
2. Bearish Moving Average Crossover
3. Bearish Centerline Crossover
Negative Divergence
A Negative Divergence forms when the security advances or moves sideways, and the MACD declines. The Negative
Divergence in MACD can take the form of either a lower High or a straight decline. Negative Divergences are probably the
least common of the three signals, but are usually the most reliable, and can warn of an impending peak.

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The FedEx (FDX) chart shows a Negative Divergence when MACD formed a lower High in May, and the stock formed a
higher High at the same time. This was a rather blatant Negative Divergence, and signaled that momentum was slowing.
A few days later, the stock broke the uptrend line, and the MACD formed a lower Low.
There are two possible means of confirming a Negative Divergence. First, the indicator can form a lower Low. This is
traditional peak-and-trough analysis applied to an indicator. With the lower High and subsequent lower Low, the uptrend
for MACD has changed from bullish to bearish. Second, a Bearish Moving Average Crossover (which is explained below)
can act to confirm a negative divergence. As long as MACD is trading above its 9-day EMA, or trigger line, it has not
turned down and the lower High is difficult to confirm. When MACD breaks below its 9-day EMA, it signals that the short-
term trend for the indicator is weakening, and a possible interim peak has formed.
Bearish Moving Average Crossover
The most common signal for MACD is the moving average crossover. A Bearish Moving Average Crossover occurs when
MACD declines below its 9-day EMA. Not only are these signals the most common, but they also produce the most false
signals. As such, moving average crossovers should be confirmed with other signals to avoid whipsaws and false
readings.

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Sometimes a stock can be in a strong uptrend, and MACD will remain above its trigger line for a sustained period of time.
In this case, it is unlikely that a Negative Divergence will develop. A different signal is needed to identify a potential
change in momentum. This was the case with Merck (MRK) in February and March. The stock advanced in a strong
uptrend, and MACD remained above its 9-day EMA for 7 weeks. When a Bearish Moving Average Crossover occurred, it
signaled that upside momentum was slowing. This slowing momentum should have served as an alert to monitor the
technical situation for further clues of weakness. Weakness was soon confirmed when the stock broke its uptrend line and
MACD continued its decline and moved below zero.
Bearish Centerline Crossover
A Bearish Centerline Crossover occurs when MACD moves below zero and into negative territory. This is a clear
indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can
act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once
MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.

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The significance of the centerline crossover will depend on the previous movements of MACD as well. If MACD is positive
for many weeks, begins to trend down, and then crosses into negative territory, it would be bearish. However, if MACD
has been negative for a few months, breaks above zero, and then back below, it might be a correction. In order to judge
the significance of a centerline crossover, traditional technical analysis can be applied to see if there has been a change in
trend, higher High or lower Low.

The Unisys (UIS) chart depicts a Bearish Centerline Crossover that preceded a 25% drop in the stock that occurs just
off the right edge of the chart. Although there was little time to act once this signal appeared, there were other warnings
signs prior to the dramatic drop:
1. After the drop to trend line support, a Bearish Moving Average Crossover formed.
2. When the stock rebounded from the drop, MACD did not even break above the trigger line, indicating weak
upside momentum.
3. The peak of the reaction rally was marked by a shooting star candlestick (blue arrow) and a gap down on
increased volume (red arrows).
4. After the gap down, the blue trend line was broken.
In addition to the signals mentioned above, a Bearish Centerline Crossover occurred after MACD had been above zero for
almost two months. From 20 Sept on, MACD had been weakening and momentum was slowing. The break below zero
acted as the final straw of a long weakening process.

Combining Signals
As with bullish MACD signals, bearish signals can be combined to create more robust signals. In most cases, stocks fall
faster than they rise. This was definitely the case with Unisys (UIS), and only two bearish MACD signals were present.
Using momentum indicators like MACD, technical analysis can sometimes provide clues to impending weakness. While it
may be impossible to predict the length and duration of the decline, being able to spot weakness can enable traders to
take a more defensive position.

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In 2002, Intel (INTC) dropped from above 36 to below 28 in a few months. Yet it would seem that smart money began
distributing the stock before the actual decline. Looking at the technical picture, we can spot evidence of
this distribution and a serious loss of momentum:
1. In December, a negative divergence formed in MACD.
2. Chaikin Money Flow turned negative on December 21.
3. Also in December, a Bearish Moving Average Crossover occurred in MACD (black arrow).
4. The trend line extending up from October was broken on 20 December.
5. A Bearish Centerline Crossover occurred in MACD on 10 Feb (green arrow).
6. On 15 February, support at 31 1/2 was violated (red arrow).
For those waiting for a recovery in the stock, the continued decline of momentum suggested that selling pressure was
increasing, and not about to decrease. Hindsight is 20/20, but with careful study of past situations, we can learn how to
better read the present and prepare for the future.

MACD Benefits
One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a
trend-following indicator, it will not be wrong for very long. The use of moving averages ensures that the indicator will
eventually follow the movements of the underlying security. By usingExponential Moving Averages (EMAs), as opposed
to Simple Moving Averages (SMAs), some of the lag has been taken out.
As a momentum indicator, MACD has the ability to foreshadow moves in the underlying security. MACD divergences can
be key factors in predicting a trend change. A Negative Divergence signals that bullish momentum is waning, and there
could be a potential change in trend from bullish to bearish. This can serve as an alert for traders to take some profits in
long positions, or for aggressive traders to consider initiating a short position.
MACD can be applied to daily, weekly or monthly charts. MACD represents the convergence and divergence of two
moving averages. The standard setting for MACD is the difference between the 12 and 26-period EMA. However, any
combination of moving averages can be used. The set of moving averages used in MACD can be tailored for each
individual security. For weekly charts, a faster set of moving averages may be appropriate. For volatile stocks, slower
moving averages may be needed to help smooth the data. Given that level of flexibility, each individual should adjust the
MACD to suit his or her own trading style, objectives and risk tolerance.

MACD Drawbacks
One of the beneficial aspects of the MACD is also one of its drawbacks. Moving averages, be they simple, exponential or
weighted, are lagging indicators. Even though MACD represents the difference between two moving averages, there can
still be some lag in the indicator itself. This is more likely to be the case with weekly charts than daily charts. One solution
to this problem is the use of the MACD-Histogram.

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MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels
that historically represent overbought and oversold levels, MACD does not have any upper or lower limits to bind its
movement. MACD can continue to overextend beyond historical extremes.

MACD calculates the absolute difference between two moving averages and not the percentage difference. MACD is
calculated by subtracting one moving average from the other. As a security increases in price, the difference (both positive
and negative) between the two moving averages is destined to grow. This makes its difficult to compare MACD levels over
a long period of time, especially for stocks that have grown exponentially.

The Amazon (AMZN) chart demonstrates the difficult in comparing MACD levels over a long period of time. Before
1999, Amazon's MACD is barely recognizable, and appears to trade close to the zero line. MACD was indeed quite
volatile at the time, but this volatility has been dwarfed since the stock rose from below 20 to almost 100.
An alternative is to use the Price Oscillator, which shows the percentage difference between two moving averages:

(12 day EMA - 26 day EMA) / (26 day EMA)

(20 - 18) / 18 = .11 or +11%

The resulting percentage difference can be compared over a longer period of time. On the Amazon chart, we can see that
the Price Oscillator provides a better means for a long-term comparison. For the short term, MACD and the Price
Oscillator are basically the same. The shape of the lines, the divergences, moving average crossovers and centerline
crossovers for MACD and the Price Oscillator are virtually identical.
Pros and Cons of the MACD
Since Gerald Appel developed the MACD, there have been hundreds of new indicators introduced to technical analysis.
While many indicators have come and gone, the MACD has stood the test of time. The concept behind its use is
straightforward, and its construction is simple, yet it remains one of the most reliable indicators around. The effectiveness
of the MACD will vary for different securities and markets. The lengths of the moving averages can be adapted for a better
fit to a particular security or market. As with all indicators , MACD is not infallible and should be used in conjunction with
other technical analysis tools.

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MACD-Histogram
In 1986, Thomas Aspray developed the MACD-Histogram. Some of his findings were presented in a series of articles
for Technical Analysis of Stocks and Commodities. Aspray noted that MACD's lag would sometimes miss important moves
in a security, especially when applied to weekly charts. He first experimented by changing the moving averages and found
that shorter moving averages did indeed speed up the signals. However, he was looking for a means to anticipate MACD
crossovers. One of the answers he came up with was the MACD-Histogram.

Definition and Construction


The MACD-Histogram represents the difference between the MACD and its trigger line, the 9-day EMA of MACD. The plot
of this difference is presented as a histogram, making centerline crossovers and divergences easily identifiable. A
centerline crossover for the MACD-Histogram is the same as a moving average crossover for MACD. If you will recall, a
moving average crossover occurs when MACD moves above or below the trigger line.
If the value of MACD is larger than the value of its 9-day EMA, then the value on the MACD-Histogram will be positive.
Conversely, if the value of MACD is less than its 9-day EMA, then the value on the MACD-Histogram will be negative.

Further increases or decreases in the gap between MACD and its trigger line will be reflected in the MACD-Histogram.
Sharp increases in the MACD-Histogram indicate that MACD is rising faster than its 9-day EMA and bullish momentum is
strengthening. Sharp declines in the MACD-Histogram indicate that MACD is falling faster than its 9-day EMA and bearish
momentum is increasing.

On the chart above, we can see that the MACD-Histogram movements are relatively independent of the actual MACD.
Sometimes the MACD is rising while the MACD-Histogram is falling. At other times, the MACD is falling while the MACD-
Histogram is rising. The MACD-Histogram does not reflect the absolute value of the MACD, but rather the value of the

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MACD relative to its 9-day EMA. Usually, but not always, a move in the MACD is preceded by a corresponding divergence
in the MACD-Histogram.

1. The first point shows a sharp positive divergence in the MACD-Histogram that preceded a Bullish Moving
Average Crossover.
2. On the second point, the MACD continued to new Highs but the MACD-Histogram formed two equal Highs.
Although not a textbook case of Positive Divergence, the equal High failed to confirm the strength seen in the
MACD.
3. A Positive Divergence formed when the MACD-Histogram formed a higher Low and the MACD continued lower.
4. A Negative Divergence formed when the MACD-Histogram formed a lower High and the MACD continued higher.
Usage
Thomas Aspray designed the MACD-Histogram as a tool to anticipate a moving average crossover in the MACD.
Divergences between MACD and the MACD-Histogram are the main tool used to anticipate moving average crossovers.
A Positive Divergence in the MACD-Histogram indicates that the MACD is strengthening and could be on the verge of a
Bullish Moving Average Crossover. A Negative Divergence in the MACD-Histogram indicates that the MACD is
weakening, and it foreshadows a Bearish Moving Average Crossover in the MACD.

In his book, Technical Analysis of the Financial Markets, John Murphy asserts that the best use for the MACD-Histogram
is in identifying periods when the gap between the MACD and its 9-day EMA is either widening or shrinking. Broadly
speaking, a widening gap indicates strengthening momentum and a shrinking gap indicates weakening momentum.
Usually a change in the MACD-Histogram will precede any changes in the MACD.
Signals
The main signal generated by the MACD-Histogram is a divergence followed by a moving average crossover. A bullish
signal is generated when a Positive Divergence forms and there is a Bullish Centerline Crossover. A bearish signal is
generated when there is a Negative Divergence and a Bearish Centerline Crossover. Keep in mind that a centerline
crossover for the MACD-Histogram represents a moving average crossover for the MACD.
Divergences can take many forms and varying degrees. Generally speaking, two types of divergences have been
identified: the slant divergence and the peak-trough divergence.

Slant Divergence
A Slant Divergence forms when there is a continuous and relatively smooth move in one direction (up or down) to form the
divergence. Slant Divergences generally cover a shorter time frame than divergences formed with two peaks or two
troughs. A Slant Divergence can contain some small bumps (peaks or troughs) along the way. The world of technical
analysis is not perfect and there are exceptions to most rules and hybrids for many signals.

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Peak-Trough Divergence
A peak-trough divergence occurs when at least two peaks or two troughs develop in one direction to form the divergence.
A series of two or more rising troughs (higher lows) can form a Positive Divergence and a series of two or more declining
peaks (lower highs) can form a Negative Divergence. Peak-trough Divergences usually cover a longer time frame than
slant divergences. On a daily chart, a peak-trough divergence can cover a time frame as short as two weeks or as long as
several months.
Usually, the longer and sharper the divergence is, the better any ensuing signal will be. Short and shallow divergences
can lead to false signals and whipsaws. In addition, it would appear that Peak-trough Divergences are a bit more reliable
than Slant Divergences. Peak-trough Divergences tend to be sharper and cover a longer time frame than Slant
Divergences.

MACD-Histogram Benefits
The main benefit of the MACD-Histogram is its ability to anticipate MACD signals. Divergences usually appear in the
MACD-Histogram before MACD moving average crossovers do. Armed with this knowledge, traders and investors can
better prepare for potential trend changes.

The MACD-Histogram can be applied to daily, weekly or monthly charts. (Note: This may require some tinkering with the
number of periods used to form the original MACD; shorter or faster moving averages might be necessary for weekly and
monthly charts.) Using weekly charts, the broad underlying trend of a stock can be determined. Once the broad trend has
been determined, daily charts can be used to time entry and exit strategies. In Technical Analysis of the Financial
Markets, John Murphy advocates this type of two-tiered approach to investing in order to avoid making trades against the
major trend. The weekly MACD-Histogram can be used to generate a long-term signal in order to establish the tradable
trend. Then only short-term signals that agree with the major trend would be considered.
After the trend has been established, MACD-Histogram divergences can be used to signal impending reversals. If the
long-term trend was bullish, a negative divergences with bearish centerline crossovers would signal a possible reversal. If
the long-term trend was bearish, traders would watch for a positive divergences with bullish centerline crossovers.

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On the IBM weekly chart, the MACD-Histogram generated four signals. Before each moving average crossover in the
MACD, a corresponding divergence formed in the MACD-Histogram. To make adjustments for the weekly chart, the
moving averages have been shortened to 6 and 12. This MACD is formed by subtracting the 6-week EMA from the 12-
week EMA. A 6-week EMA has been used as the trigger. The MACD-Histogram is calculated by taking the difference
between MACD (6/12) and the 6-day EMA of MACD (6/12).
1. The first signal was a Bearish Moving Average Crossover in January, 1999. From its peak in late November,
1998, the MACD-Histogram formed a Negative Divergence that preceded the Bearish Moving Average Crossover in
the MACD.
2. The second signal was a Bullish Moving Average Crossover in April. From its low in mid-February, the MACD-
Histogram formed a Positive Divergence that preceded the Bullish Moving Average Crossover in the MACD.
3. The third signal was a Bearish Moving Average Crossover in late July. From its May peak, the MACD-Histogram
formed a Negative Divergence that preceded a Bearish Moving Average Crossover in the MACD.
4. The final signal was a Bullish Moving Average Crossover, which was preceded by a slight Positive Divergence in
the MACD-Histogram.
The third signal was based on a Peak-trough Divergence Two readily identifiable and consecutive lower peaks formed to
create the divergence. The peaks and troughs on the previous divergences, although identifiable, do not stand out as
much.

MACD-Histogram Drawbacks
The MACD-Histogram is an indicator of an indicator or a derivative of a derivative. The MACD is the first derivative of the
price action of a security, and the MACD-Histogram is the second derivative of the price action of a security. As the
second derivative, the MACD-Histogram is further removed from the actual price action of the underlying security. The
further removed an indicator is from the underlying price action, the greater the chances of false signals. Keep in mind that
this is an indicator of an indicator. The MACD-Histogram should not be compared directly with the price action of the
underlying security.
Because MACD-Histogram was designed to anticipate MACD signals, there is a temptation to jump the gun. The MACD-
Histogram should be used in conjunction with other aspects of technical analysis. This will help to alleviate the temptation
for early entry. Another means to guard against early entry is to combine weekly signals with daily signals. Of course,
there will be more daily signals than weekly signals. However, by using only the daily signals that agree with the weekly
signals, there will be fewer daily signals to act on. By acting only on those daily signals that are in agreement with the
weekly signals, you are also assured of trading with the longer trend and not against it.

Be careful of small and shallow divergences. While these may sometimes lead to good signals, they are also more apt to
create false signals. One method to avoid small divergences is to look for larger divergences with two or more readily
identifiable peaks or troughs. Compare the peaks and troughs from past action to determine significance. Only peaks and
troughs that appear to be significant should warrant attention.

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MACD Histogram
The MACD Histogram is useful for anticipating changes in trend.

Overview
The MACD Histogram (MACD-H) consists of vertical bars showing the difference between the MACD
line and its signal line • A change in the MACD-H will usually precede any changes in MACD
• Signals are generated by direction, zero line crossovers and divergence from MACD
• As an indicator of an indicator, MACD-H should be compared with MACD rather than with the price
action of the underlying market.

MACD-H is used with MACD as a complementary indicator.

Thomas Aspray found that MACD signals often lagged important market moves, especially when applied
to weekly charts. He first experimented with changing the moving averages and found that shorter
moving averages did indeed speed up the signals. However, he was looking for a means to anticipate
MACD crossovers and came up with the MACD Histogram.

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Interpretation
The MACD Histogram represents the difference between MACD and it's signal line (usually the 9-day
Exponential Moving Average (EMA) of the MACD). Whenever MACD crosses the signal line, MACD-H
crosses the zero line.

• If the MACD line is above the signal line, the histogram is positive, and the bars are drawn above the
zero line.
• If the MACD line is below the signal line, histogram is negative, and the bars are drawn below the zero
line.

Sharp increases in the MACD-H indicate that MACD is rising faster than its 9-day EMA and upward
momentum is strengthening. Sharp declines in the MACD-H indicate that MACD is falling faster than its
moving average and downward momentum is increasing.

34
Divergences between MACD and MACD-H are the main tool used to anticipate crossovers. A positive
divergence in the MACD-H indicates that MACD is strengthening and could be on the verge of a bullish
moving average crossover. A negative divergence in the MACD-H indicates that MACD is weakening
and can act to foreshadow a bearish moving average crossover in MACD.

Signals
The main signal generated by the MACD-Histogram is a divergence from MACD followed by a zero-line
crossover.

• A bullish signal is generated when a positive divergence forms and there is an upward zero line
crossover.
• A bearish signal is generated when there is a negative divergence and a downward zero line
crossover.

In Technical Analysis of the Financial Markets, John Murphy states that the real value of the MACD-H is
spotting when the spread between the two lines is widening or narrowing. When the histogram is above
its zero line (positive) but starts to fall, the uptrend is weakening. Conversely, when the histogram is
below its zero line (negative) and starts to rise, the downtrend is losing momentum. These turns of the
histogram provide early warnings that the current trend is losing momentum, and the buy or sell signal is
given when the histogram crosses the zero line.

Murphy also advocates a two-tiered approach in order to avoid making trades against the major trend.
The weekly MACD-H can be used to generate long-term signals. Then only short-term signals that agree
with the major trend are used.

• If the long-term trend is up, only positive divergences with upward zero line crossovers are considered
valid for the MACD-H.
• If the long-term trend is down, only negative divergences with downward zero line crossovers are
considered valid.

Used this way, the weekly signals become trend filters for daily signals. This prevents using daily signals
to trade against the overall trend.

Information provided by chartfilter.com

The MACD is constructed from two EMAs, or exponential moving averages, derived from the historical price
movement of the asset being studied. In a traditional average, all data is treated equally. When calculating an
EMA, some data is given a higher weight, or importance, than other data. In the case of MACD, the more
recent the data, the more importance it is given. An EMA of six, for example, averages the last six values
while giving more weight to the most recent ones.

35
MACD subtracts the longer average from the shorter average, and the result is plotted on a chart or graph.
MACD typically uses 26- and 12-day EMAs, meaning it looks at the last 26 and 12 days worth of data. The
resultant chart oscillates around zero, without preset bounds in either upper or lower directions. In addition to
the difference between the averages, MACD values are themselves averaged to produce a center,
or trigger line.

MACD attempts to measure both price trend and momentum, where momentum can be thought of as the
strength of the trend. If MACD is greater than zero, it means the short-term average is higher than the long-
term average, suggesting thefinancial instrument is trending upwards. Similarly, if MACD is less than zero it
suggests the instrument is trending downwards. The steeper the slope of the MACD plot, the more violently
the price is moving and, therefore, the stronger the momentum.

Bullish and bearish signals can be generated by crossovers or divergences. A divergence occurs when the
MACD indicates a move in one direction while the asset price is moving in the other. A crossover is simply the
MACD moving over or under the zero (neutral) point, or alternately, crossing its own trigger line. A MACD
crossing from positive to negative would be a bearish signal, while a cross from negative to positive is a
bullish signal.

MACD Histogram Helps Determine Trend Changes


by Investopedia Staff, (Investopedia.com) (Contact Author | Biography)

Here we look at the moving average convergence divergence (MACD) histogram, a measurement of the
difference between the fast MACD line and the signal line. (Learn more in A Primer On The MACD.)

Error! Unknown switch argument.


The calculation of the signal line requires that you take the difference between the twoEMAs, and from that
number create a nine-daymoving average. But sophisticated charting software makes life easy with its back-
testing capabilities that automatically prepare all the calculations instantly for the user. In this respect, it is
sometimes interesting to know the formula used to derive the number, but never necessary to start calculating
the numbers on your own.

Principles
Here we look at a number of charts and explain them in detail so that you fully understand this important
indicator, and its clear buy and sell signals. First let's highlight the principles of all technical work:

• Stock prices tend to move in trends.


• Volume is always a strong component with the trends.
• Trends will tend to continue with strength, once established.

Nortel Example
The first chart is that of Nortel Networks, the Canadian tech giant that saw its stock price drop from the C$120

36
area to under $9 in a period of 53 weeks. Apart from two very strong sell signals in the summer of 2000,
investors paid little attention to these strong overbought points and continued to trade into the "street" hype
that was the norm surrounding so many of the tech/internet issues of that period.

Since the early part of Sept 2000, the downtrend that was then established remained intact. Now, having said
that, there were buyers from those lofty levels all the way down to its single-digit trading price: why would a
broker or financial advisor put a client back into an issue that displays nothing but heavy selling to the
downside?

You can see by the trendline drawn on the chart, there was no change in the trend since Aug 2000, and look
closely at the diminished volume over the last four months or so shown on the chart. At the same time the
moving averages of the MACD were hugging the signal line, showing no clear buy or sell signal at all.

Figure 1: Nortel Example Chart


Created Using TradeStation 2000

At that time, comments made by company CEO John Roth had indicated that the company would find itself in
a rebuilding mode until late 2002 and perhaps even into the early part of 2003. Now from a fundamental
standpoint, the technician would have stayed away from this chart because a sideways trading pattern would
start to develop once a bottom was established, and in the case of Nortel Networks, the bottom was imminent.
(Learn more about using MACD in Spotting Trend Reversals With MACD.)

Cisco Example
In the second chart, that of Cisco Systems, two very clear sell signals were indicated. The first, in Dec 2000
from the $55 level saw the stock price drop off dramatically to about the $35 level in a matter of a few trading
days and then another sell signal triggered another series of down days seeing the issue drop to the mid-
teens in a period of two months. Since then, you could see that the company traded in a somewhat narrow
range (sideways movement) and the two EMAs that made up the MACD were hugging the signal line. This is
a "wait-and-see" pattern. Take a good look at the trendline, showing the downtrend in volume during this
period of sideways trading. No interest, no volume.

37
Created by TradeStation 2000

Conclusion
MACD helps you to determine changes in trends, either short-term or the long-term variety. Learn to
recognize them and do not bet against them. (For more, check out Moving Average MACD
Combo and Trading The MACD Divergence.)

In last week's StreetAuthority Swing Trader we discussed the importance of MACD. You
saw that an important component of a successful trading system is to combine weekly and
daily MACD signals. You can do so by taking the daily signals that are in accordance with
both the weekly MACD and the overall trend (as measured by the 30- or 40-week moving
average).

MACD can be made even more useful by incorporating a related indicator -- the MACD
histogram. Thomas Aspray described the histogram in 1986. Like MACD, it oscillates
around a zero line. But while MACD is an indicator based on moving averages, the

38
histogram is an indicator of an indicator -- the MACD itself.

What the histogram shows in graphic form is the difference between the main MACD line
(the 12-26 line) and the nine-period trigger line. This difference is then plotted on a scale to
form a histogram, defined as a series of vertical lines. The higher the lines "grow" above the
histogram's zero line, the stronger the price momentum and the more bullish the trend. The
further the lines decline below the zero line, the stronger the negative the trend and the
more downside pressure there is. When the MACD indicator itself issues a buy or sell
signal, then the histogram is always at its own zero line.

Although you can derive the same information by eyeballing the underlying MACD indicator,
the histogram does the job for you, allowing you to spend your full energy on technical
analysis.

There are two important ways to use the histogram to generate trading signals. First, the
histogram tells you when momentum is beginning to wane. Since a key principle of
technical analysis is that momentum precedes price, the histogram gives the technician an
early warning that prices may be about to reverse course.

39
The chart above is the weekly chart of the S&P 500 index with the 40, 12 and 26-week
moving averages shown, as well as MACD and the histogram. First, note that in one year of
trading, there have been only three crosses of this histogram above and below the zero
line, reflecting the three underlying MACD signals in this time frame. Clearly, these signals
are infrequent enough to be carefully noted.

Second, note the negative momentum peak in mid-July and the positive momentum peak in
late December. As a trader, one should avoid taking a short position at the peak of negative
momentum and a long position at the peak of positive momentum.

The histogram is thus an early warning indicator, telling the trader that a momentum peak
has been reached and that a peak in price may not be far away. Given the overall
downtrend as measured by the 40-week moving average, going long at the momentum
peak would be a serious error and could prove costly.

The histogram also gives important divergence signals. Negative divergence occurs when
prices rally to a new high or back to approximately the same level and the histogram is
lower. Positive divergence occurs when prices reach a lower low, but the MACD histogram
is at a higher level.

The best example of histogram divergence on this chart can be seen when comparing the
July and October lows, both of which occurred at around S&P 775. Note that the first low
occurred at about –20 on the histogram scale, whereas the second low was very close to
the 0 line. The trader who perceived this signal would be on the alert for a price reversal.
When the actual MACD crossover occurred in early October, the opportunity could have
been acted on without hesitation.

The MACD histogram combines well with MACD to give you a trend-following and
momentum indicator all in one. It is an indispensable tool of technical analysis. Next week
we will explore the idea of MACD divergence in more detail.

Learn How to Apply MACD to Your Trading - Part 1


By Gerald Appel AND Marvin Appel | TradingMarkets.com

The Moving Average Convergence - Divergence Indicator (MACD) has been a staple of technical analysis since Gerald
invented it more than 30 years ago. We speculate that part of the reason why MACD has become so popular is its
versatility: you can use it as an indicator with which to recognize and follow strong trends, and also as a tool for
recognizing trendreversals.

In this article, we will discuss how to calculate the MACD and some basic ways to interpret it.

How to calculate MACD


The heart of the MACD is the difference between two moving averages: a faster one (reflecting shorter term market
trends) minus a slower one (reflecting longer term trends).

We frequently utilize two different sets of moving averages to calculate MACDs: a 12-day exponential moving average as
the faster one paired with a 26-day exponential moving average for the slower one, or a 19-day exponential moving
average paired with a 39-day average.

For example, the 12-26 day MACD is calculated each day as: 12-day exponential moving average minus 26-day
exponential moving average.

This begs the question of how to calculate N-day exponential moving averages (here, N is 12 or 26), which we will now
briefly review:

40
First, find the smoothing constant 2/(N+1). In the case of the 12-day exponential moving average, the smoothing constant
would be 2/(12+1) = 2/13 = 0.154. In the case of the 27-day exponential moving average, the smoothing constant would
be 2/(26+1) = 2/27 = 0.074.

For brevity, let's call exponential moving averages by a shorter name, "expo". Having calculated the smoothing constants
we use them to update the exponential moving averages for each new piece of data as follows:

For brevity, let's call exponential moving averages by a shorter name, "expo". Having calculated the smoothing constants
we use them to update the exponential moving averages for each new piece of data as follows:

Here is an example of the numerical calculations. Suppose that yesterday, the price was 265, the 12-day expo was
266 and the 26-day expo was 263.

Yesterday's MACD would therefore have been 12-day expo minus 26 day expo = 266-263 = 3. Now suppose that
today's closing price rose to 270.

One last detail: These formulas are recursive, which means that today's reading depends on yesterday's, which does
not tell you where to start. A simple approximation is to use the earliest price you have as the earliest exponential
moving average reading. Following this procedure introduces a small error, but after a few weeks of data that error
becomes negligible.

Basic patterns

Two of the most important features of the MACD are whether it is above or below zero, and whether it is rising or
falling.

As a general rule of thumb, the market climate is most unfavorable when MACD is falling and below zero.

This signifies that shorter term market trends are weaker than longer term trends. This is not to imply that every day
on which MACD is falling and below zero is necessarily going to be a losing day. However, in our experience, this rule
of thumb has correctly identified shorter and longer market corrections.

When you study how MACD works with the vehicles you like to trade, it is vitally important to keep in mind that you
cannot act on an MACD reading until the day after the data are in.

You can use this information only for the next day. (Here we assume daily MACDs, but you could apply the same
techniques to intra-day data such as 60-minute bars, or to weekly data.)

41
For example, if we say that periods when the MACD are falling and below zero are unfavorable, we really mean that
the days following MACD readings that are falling and below zero have been worse than average.

Let's see this in action.

Example: Dow-Jones AIG Energy Index

There are two reasons to study this particular index.

1. Given the surge in oil prices to record highs, energy has become a hot topic.
2. There exist exchange-traded notes (similar to ETFs) that track this specific index. Although past results never
guarantee what will happen to an investment in the future, we consider it an advantage to trade an investment that
has extensive real time history or that tracks an index with an extensive history.

Daily data on the DJ-AIG Energy Index is available back to 1991.

Figure 1 below shows seventeen years of history for the DJ-AIG Energy Index (1991-2008). The gray part of the price
chart represents days immediately following MACD readings below zero. The black part of the price chart represents
days immediately following MACD readings above zero. Notice that all the major corrections were characterized by
MACD less than 0, and the major uptrends by MACD greater than 0.

Figure 1: Dow Jones-AIG Energy Index, 1991-2008 in two colors: Gray when MACD was below zero the day before,
and black when MACD was above zero the day before.

Analysis of the daily price and MACD data revealed that on days following when the 19-39 day MACD was greater
than zero, the DJ-AIG Energy Index rose at a rate of 14%/year while invested. This favorable condition was in effect
55% of the time. On the other hand, on days following MACD readings below zero, this energy index fell at an
annualized rate of 2%/year.

Even worse, days following MACD readings that were falling and below zero saw an annualized loss rate of 11%/year.
This bearish condition was in effect 22% of the time. During the entire period, the index gained 6.1%/year. It does
appear that the 19-39 day MACD did an excellent job discriminating between bullish and bearish conditions in the
energy market.

Conclusion

We have seen how to calculate the MACD, although many of you may be using software packages that do this for
you.

42
The first bits of information to glean are whether the MACD is above or below zero, and whether it is rising or falling.
Generally, market conditions are unfavorable when the MACD is falling and below zero.

Next we saw that by converting MACD from units of price (or points) to units of %, it is possible to compare market
conditions from periods when prices varied widely. In the case of the Dow Jones Industrial Average, we saw that -3%
has historically been a long-term oversold level for the 12-26 week MACD%, and frequently a prelude to excellent
market entries.

We cannot emphasize enough that you need to experiment with whatever vehicle you are trading to determine
whether the MACD patterns presented here might also be relevant to your own investment, because that will often not
be the case.

Also, you should take potential transaction costs into account when deciding how you might want to apply the MACD
to your own investing strategies.

The concepts discussed here are covered in more detail in Gerald Appel's book, "Technical Analysis: Power Tools for
Active Investors" (2005).

In the second part of this series Gerald and Marvin Appel will show you how MACD can be used as an indicator of the
overall investment climate.

Gerald Appel is the President of Signalert Corporation of Great Neck, New York, an SEC-registered investment
advisory firm. He is the inventor of the MACD and the author of a number of groundbreaking investment books, the
most recent of which is Beating the Market Three Months at a Time (2008), which he co-authored with Marvin Appel.

Marvin Appel is the CEO of Appel Asset Management Corporation, also an SEC-registered investment advisory firm
in Great Neck. He is a renowned expert in exchange-traded funds and the editor of the well-regarded investment
newsletter Systems and Forecasts. For more information about the material discussed in this article, please
visit www.systemsandforecasts.com.

>> See more articles by Gerald Appel AND Marvin Appel

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Moving Average Convergence/Divergence


(MACD)
MACD Formula
The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential
Moving Averages (EMAs). This is the formula that is used in many popular technical analysis programs,
including SharpCharts, and quoted in most technical analysis books on the subject. Appel and others have since tinkered
with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter
moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a
slower indicator, less prone to whipsaws. For our purposes in this article, the traditional 12/26 MACD will be used for
explanations. Later in the indicator series, we will address the use of different moving averages in calculating MACD.

43
Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing
prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line.
A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish crossover occurs when MACD moves
below its 9-day EMA. The Merrill Lynch (MER) chart below shows the 12-day EMA (thin blue line) with the 26-day EMA
(thin red line) overlaid the price plot. MACD appears in the box below as the thick black line and its 9-day EMA is the thin
blue line. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when
MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

What Does MACD Do?


MACD measures the difference between two Exponential Moving Averages (EMAs). A positive MACD indicates that the
12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-
day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This
indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving
average. Positive momentum is increasing, indicating a bullish period for the price plot. If MACD is negative and declining
further, then the negative gap between the faster moving average (blue) and the slower moving average (red) is
expanding. Downward momentum is accelerating, indicating a bearish period of trading. MACD centerline crossovers
occur when the faster moving average crosses the slower moving average.

44
This Merrill Lynch (MER) chart shows MACD as a solid black line, and its 9-day EMA as the thin blue line. Even though
moving averages are lagging indicators, notice that MACD moves faster than the moving averages. In this example,
MACD provided a few good trading signals as well:
1. In March and April, MACD turned down ahead of both moving averages, and formed a negative divergence
ahead of the price peak.
2. In May and June, MACD began to strengthen and make higher Lows while both moving averages continued to
make lower Lows.
3. Finally, MACD formed a positive divergence in October while both moving averages recorded new Lows.
MACD Bullish Signals
MACD generates bullish signals from three main sources:

1. Positive Divergence
2. Bullish Moving Average Crossover
3. Bullish Centerline Crossover
Positive Divergence

45
A Positive Divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower
reaction low. MACD can either form as a series of higher Lows or a second Low that is higher than the previous Low.
Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the
biggest moves.

Bullish Moving Average Crossover

46
A Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA, or trigger line. Bullish Moving
Average Crossovers are probably the most common signals and as such are the least reliable. If not used in conjunction
with other technical analysis tools, these crossovers can lead to whipsaws and many false signals. Bullish Moving
Average Crossovers are used occasionally to confirm a positive divergence. A positive divergence can be considered
valid when a Bullish Moving Average Crossover occurs after the MACD Line makes its second "higher Low".
Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An
example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days. The
buy signal would then commence at the end of the third day.

Bullish Centerline Crossover

A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a clear
indication that momentum has changed from negative to positive, or from bearish to bullish. After a Positive Divergence
and Bullish Centerline Crossover, the Bullish Centerline Crossover can act as a confirmation signal. Of the three signals,
moving average crossover are probably the second most common signals.

Using a Combination of Signals

47
Even though some traders may use only one of the above signals to form a buy or a sell signal, using a combination can
generate more robust signals. In the Halliburton (HAL) example, all three bullish signals were present and the stock still
advanced another 20%. The stock formed a lower Low at the end of February, but MACD formed a higher Low, thus
creating a potential Positive Divergence. MACD then formed a Bullish Moving Average Crossover by moving above its 9-
day EMA. And finally, MACD traded above zero to form a Bullish Centerline Crossover. At the time of the Bullish
Centerline Crossover, the stock was trading at 32 1/4 and went above 40 immediately after that. In August, the stock
traded above 50.

MACD Formula
The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential
Moving Averages (EMAs). This is the formula that is used in many popular technical analysis programs,
including SharpCharts, and quoted in most technical analysis books on the subject. Appel and others have since tinkered
with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter
moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a
slower indicator, less prone to whipsaws. For our purposes in this article, the traditional 12/26 MACD will be used for
explanations. Later in the indicator series, we will address the use of different moving averages in calculating MACD.
Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing
prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line.
A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish crossover occurs when MACD moves
below its 9-day EMA. The Merrill Lynch (MER) chart below shows the 12-day EMA (thin blue line) with the 26-day EMA
(thin red line) overlaid the price plot. MACD appears in the box below as the thick black line and its 9-day EMA is the thin
blue line. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when
MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

48
What Does MACD Do?
MACD measures the difference between two Exponential Moving Averages (EMAs). A positive MACD indicates that the
12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-
day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This
indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving
average. Positive momentum is increasing, indicating a bullish period for the price plot. If MACD is negative and declining
further, then the negative gap between the faster moving average (blue) and the slower moving average (red) is
expanding. Downward momentum is accelerating, indicating a bearish period of trading. MACD centerline crossovers
occur when the faster moving average crosses the slower moving average.

49
This Merrill Lynch (MER) chart shows MACD as a solid black line, and its 9-day EMA as the thin blue line. Even though
moving averages are lagging indicators, notice that MACD moves faster than the moving averages. In this example,
MACD provided a few good trading signals as well:
1. In March and April, MACD turned down ahead of both moving averages, and formed a negative divergence
ahead of the price peak.
2. In May and June, MACD began to strengthen and make higher Lows while both moving averages continued to
make lower Lows.
3. Finally, MACD formed a positive divergence in October while both moving averages recorded new Lows.
MACD Bullish Signals
MACD generates bullish signals from three main sources:

1. Positive Divergence
2. Bullish Moving Average Crossover
3. Bullish Centerline Crossover
Positive Divergence

50
A Positive Divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower
reaction low. MACD can either form as a series of higher Lows or a second Low that is higher than the previous Low.
Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the
biggest moves.

Bullish Moving Average Crossover

51
A Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA, or trigger line. Bullish Moving
Average Crossovers are probably the most common signals and as such are the least reliable. If not used in conjunction
with other technical analysis tools, these crossovers can lead to whipsaws and many false signals. Bullish Moving
Average Crossovers are used occasionally to confirm a positive divergence. A positive divergence can be considered
valid when a Bullish Moving Average Crossover occurs after the MACD Line makes its second "higher Low".
Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An
example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days. The
buy signal would then commence at the end of the third day.

Bullish Centerline Crossover

52
A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a clear
indication that momentum has changed from negative to positive, or from bearish to bullish. After a Positive Divergence
and Bullish Centerline Crossover, the Bullish Centerline Crossover can act as a confirmation signal. Of the three signals,
moving average crossover are probably the second most common signals.

Using a Combination of Signals

53
Even though some traders may use only one of the above signals to form a buy or a sell signal, using a combination can
generate more robust signals. In the Halliburton (HAL) example, all three bullish signals were present and the stock still
advanced another 20%. The stock formed a lower Low at the end of February, but MACD formed a higher Low, thus
creating a potential Positive Divergence. MACD then formed a Bullish Moving Average Crossover by moving above its 9-
day EMA. And finally, MACD traded above zero to form a Bullish Centerline Crossover. At the time of the Bullish
Centerline Crossover, the stock was trading at 32 1/4 and went above 40 immediately after that. In August, the stock
traded above 50.

MACD Benefits
One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a
trend-following indicator, it will not be wrong for very long. The use of moving averages ensures that the indicator will
eventually follow the movements of the underlying security. By usingExponential Moving Averages (EMAs), as opposed
to Simple Moving Averages (SMAs), some of the lag has been taken out.
As a momentum indicator, MACD has the ability to foreshadow moves in the underlying security. MACD divergences can
be key factors in predicting a trend change. A Negative Divergence signals that bullish momentum is waning, and there
could be a potential change in trend from bullish to bearish. This can serve as an alert for traders to take some profits in
long positions, or for aggressive traders to consider initiating a short position.
MACD can be applied to daily, weekly or monthly charts. MACD represents the convergence and divergence of two
moving averages. The standard setting for MACD is the difference between the 12 and 26-period EMA. However, any
combination of moving averages can be used. The set of moving averages used in MACD can be tailored for each
individual security. For weekly charts, a faster set of moving averages may be appropriate. For volatile stocks, slower
moving averages may be needed to help smooth the data. Given that level of flexibility, each individual should adjust the
MACD to suit his or her own trading style, objectives and risk tolerance.

MACD Drawbacks
One of the beneficial aspects of the MACD is also one of its drawbacks. Moving averages, be they simple, exponential or
weighted, are lagging indicators. Even though MACD represents the difference between two moving averages, there can
still be some lag in the indicator itself. This is more likely to be the case with weekly charts than daily charts. One solution
to this problem is the use of the MACD-Histogram.
MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels
that historically represent overbought and oversold levels, MACD does not have any upper or lower limits to bind its
movement. MACD can continue to overextend beyond historical extremes.

MACD calculates the absolute difference between two moving averages and not the percentage difference. MACD is
calculated by subtracting one moving average from the other. As a security increases in price, the difference (both positive
and negative) between the two moving averages is destined to grow. This makes its difficult to compare MACD levels over
a long period of time, especially for stocks that have grown exponentially.

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The Amazon (AMZN) chart demonstrates the difficult in comparing MACD levels over a long period of time. Before
1999, Amazon's MACD is barely recognizable, and appears to trade close to the zero line. MACD was indeed quite
volatile at the time, but this volatility has been dwarfed since the stock rose from below 20 to almost 100.
An alternative is to use the Price Oscillator, which shows the percentage difference between two moving averages:

(12 day EMA - 26 day EMA) / (26 day EMA)

(20 - 18) / 18 = .11 or +11%

The resulting percentage difference can be compared over a longer period of time. On the Amazon chart, we can see that
the Price Oscillator provides a better means for a long-term comparison. For the short term, MACD and the Price
Oscillator are basically the same. The shape of the lines, the divergences, moving average crossovers and centerline
crossovers for MACD and the Price Oscillator are virtually identical.
Pros and Cons of the MACD
Since Gerald Appel developed the MACD, there have been hundreds of new indicators introduced to technical analysis.
While many indicators have come and gone, the MACD has stood the test of time. The concept behind its use is
straightforward, and its construction is simple, yet it remains one of the most reliable indicators around. The effectiveness
of the MACD will vary for different securities and markets. The lengths of the moving averages can be adapted for a better
fit to a particular security or market. As with all indicators , MACD is not infallible and should be used in conjunction with
other technical analysis tools.

MACD-Histogram
In 1986, Thomas Aspray developed the MACD-Histogram. Some of his findings were presented in a series of
articles for Technical Analysis of Stocks and Commodities. Aspray noted that MACD's lag would sometimes
miss important moves in a security, especially when applied to weekly charts. He first experimented by
changing the moving averages and found that shorter moving averages did indeed speed up the signals.
However, he was looking for a means to anticipate MACD crossovers. One of the answers he came up with
was the MACD-Histogram.

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Definition and Construction
The MACD-Histogram represents the difference between the MACD and its trigger line, the 9-day EMA of MACD. The plot
of this difference is presented as a histogram, making centerline crossovers and divergences easily identifiable. A
centerline crossover for the MACD-Histogram is the same as a moving average crossover for MACD. If you will recall, a
moving average crossover occurs when MACD moves above or below the trigger line.
If the value of MACD is larger than the value of its 9-day EMA, then the value on the MACD-Histogram will be positive.
Conversely, if the value of MACD is less than its 9-day EMA, then the value on the MACD-Histogram will be negative.

Further increases or decreases in the gap between MACD and its trigger line will be reflected in the MACD-Histogram.
Sharp increases in the MACD-Histogram indicate that MACD is rising faster than its 9-day EMA and bullish momentum is
strengthening. Sharp declines in the MACD-Histogram indicate that MACD is falling faster than its 9-day EMA and bearish
momentum is increasing.

On the chart above, we can see that the MACD-Histogram movements are relatively independent of the actual MACD.
Sometimes the MACD is rising while the MACD-Histogram is falling. At other times, the MACD is falling while the MACD-
Histogram is rising. The MACD-Histogram does not reflect the absolute value of the MACD, but rather the value of the
MACD relative to its 9-day EMA. Usually, but not always, a move in the MACD is preceded by a corresponding divergence
in the MACD-Histogram.

1. The first point shows a sharp positive divergence in the MACD-Histogram that preceded a Bullish Moving
Average Crossover.

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2. On the second point, the MACD continued to new Highs but the MACD-Histogram formed two equal Highs.
Although not a textbook case of Positive Divergence, the equal High failed to confirm the strength seen in the
MACD.
3. A Positive Divergence formed when the MACD-Histogram formed a higher Low and the MACD continued lower.
4. A Negative Divergence formed when the MACD-Histogram formed a lower High and the MACD continued higher.
Usage
Thomas Aspray designed the MACD-Histogram as a tool to anticipate a moving average crossover in the MACD.
Divergences between MACD and the MACD-Histogram are the main tool used to anticipate moving average crossovers.
A Positive Divergence in the MACD-Histogram indicates that the MACD is strengthening and could be on the verge of a
Bullish Moving Average Crossover. A Negative Divergence in the MACD-Histogram indicates that the MACD is
weakening, and it foreshadows a Bearish Moving Average Crossover in the MACD.

In his book, Technical Analysis of the Financial Markets, John Murphy asserts that the best use for the MACD-Histogram
is in identifying periods when the gap between the MACD and its 9-day EMA is either widening or shrinking. Broadly
speaking, a widening gap indicates strengthening momentum and a shrinking gap indicates weakening momentum.
Usually a change in the MACD-Histogram will precede any changes in the MACD.
Signals
The main signal generated by the MACD-Histogram is a divergence followed by a moving average crossover. A bullish
signal is generated when a Positive Divergence forms and there is a Bullish Centerline Crossover. A bearish signal is
generated when there is a Negative Divergence and a Bearish Centerline Crossover. Keep in mind that a centerline
crossover for the MACD-Histogram represents a moving average crossover for the MACD.
Divergences can take many forms and varying degrees. Generally speaking, two types of divergences have been
identified: the slant divergence and the peak-trough divergence.

Slant Divergence
A Slant Divergence forms when there is a continuous and relatively smooth move in one direction (up or down) to form the
divergence. Slant Divergences generally cover a shorter time frame than divergences formed with two peaks or two
troughs. A Slant Divergence can contain some small bumps (peaks or troughs) along the way. The world of technical
analysis is not perfect and there are exceptions to most rules and hybrids for many signals.

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Peak-Trough Divergence
A peak-trough divergence occurs when at least two peaks or two troughs develop in one direction to form the divergence.
A series of two or more rising troughs (higher lows) can form a Positive Divergence and a series of two or more declining
peaks (lower highs) can form a Negative Divergence. Peak-trough Divergences usually cover a longer time frame than
slant divergences. On a daily chart, a peak-trough divergence can cover a time frame as short as two weeks or as long as
several months.
Usually, the longer and sharper the divergence is, the better any ensuing signal will be. Short and shallow divergences
can lead to false signals and whipsaws. In addition, it would appear that Peak-trough Divergences are a bit more reliable
than Slant Divergences. Peak-trough Divergences tend to be sharper and cover a longer time frame than Slant
Divergences.

MACD-Histogram Benefits
The main benefit of the MACD-Histogram is its ability to anticipate MACD signals. Divergences usually appear in the
MACD-Histogram before MACD moving average crossovers do. Armed with this knowledge, traders and investors can
better prepare for potential trend changes.

The MACD-Histogram can be applied to daily, weekly or monthly charts. (Note: This may require some tinkering with the
number of periods used to form the original MACD; shorter or faster moving averages might be necessary for weekly and
monthly charts.) Using weekly charts, the broad underlying trend of a stock can be determined. Once the broad trend has
been determined, daily charts can be used to time entry and exit strategies. In Technical Analysis of the Financial
Markets, John Murphy advocates this type of two-tiered approach to investing in order to avoid making trades against the
major trend. The weekly MACD-Histogram can be used to generate a long-term signal in order to establish the tradable
trend. Then only short-term signals that agree with the major trend would be considered.
After the trend has been established, MACD-Histogram divergences can be used to signal impending reversals. If the
long-term trend was bullish, a negative divergences with bearish centerline crossovers would signal a possible reversal. If
the long-term trend was bearish, traders would watch for a positive divergences with bullish centerline crossovers.

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On the IBM weekly chart, the MACD-Histogram generated four signals. Before each moving average crossover in the
MACD, a corresponding divergence formed in the MACD-Histogram. To make adjustments for the weekly chart, the
moving averages have been shortened to 6 and 12. This MACD is formed by subtracting the 6-week EMA from the 12-
week EMA. A 6-week EMA has been used as the trigger. The MACD-Histogram is calculated by taking the difference
between MACD (6/12) and the 6-day EMA of MACD (6/12).
1. The first signal was a Bearish Moving Average Crossover in January, 1999. From its peak in late November,
1998, the MACD-Histogram formed a Negative Divergence that preceded the Bearish Moving Average Crossover in
the MACD.
2. The second signal was a Bullish Moving Average Crossover in April. From its low in mid-February, the MACD-
Histogram formed a Positive Divergence that preceded the Bullish Moving Average Crossover in the MACD.
3. The third signal was a Bearish Moving Average Crossover in late July. From its May peak, the MACD-Histogram
formed a Negative Divergence that preceded a Bearish Moving Average Crossover in the MACD.
4. The final signal was a Bullish Moving Average Crossover, which was preceded by a slight Positive Divergence in
the MACD-Histogram.
The third signal was based on a Peak-trough Divergence Two readily identifiable and consecutive lower peaks formed to
create the divergence. The peaks and troughs on the previous divergences, although identifiable, do not stand out as
much.

MACD-Histogram Drawbacks
The MACD-Histogram is an indicator of an indicator or a derivative of a derivative. The MACD is the first derivative of the
price action of a security, and the MACD-Histogram is the second derivative of the price action of a security. As the
second derivative, the MACD-Histogram is further removed from the actual price action of the underlying security. The
further removed an indicator is from the underlying price action, the greater the chances of false signals. Keep in mind that
this is an indicator of an indicator. The MACD-Histogram should not be compared directly with the price action of the
underlying security.
Because MACD-Histogram was designed to anticipate MACD signals, there is a temptation to jump the gun. The MACD-
Histogram should be used in conjunction with other aspects of technical analysis. This will help to alleviate the temptation
for early entry. Another means to guard against early entry is to combine weekly signals with daily signals. Of course,
there will be more daily signals than weekly signals. However, by using only the daily signals that agree with the weekly
signals, there will be fewer daily signals to act on. By acting only on those daily signals that are in agreement with the
weekly signals, you are also assured of trading with the longer trend and not against it.

Be careful of small and shallow divergences. While these may sometimes lead to good signals, they are also more apt to
create false signals. One method to avoid small divergences is to look for larger divergences with two or more readily
identifiable peaks or troughs. Compare the peaks and troughs from past action to determine significance. Only peaks and
troughs that appear to be significant should warrant attention.

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Learn How to Apply MACD to Your Trading - Part II
By Gerald Appel AND Marvin Appel

A Refinement: Using MACD to Find Overbought/oversold areas

You are not limited to checking whether MACD is above or below zero - the actual level can be important as well,
particularly at historical extremes. For example, if you calculate that MACD has gotten unusually far below zero, down to
areas seen only at previous major market bottoms, it would be reasonable to use that observation as the basis for
predicting that the market was due to turn back up.

We will see how that has worked with the Dow Jones Industrial Average, but first we need to digress to cover one more
fine point.

When analyzing multi-year charts, prices can cover a very wide range. For example, if you use the formulas presented so
far on a long-term chart of the Dow Industrials, you might get a result like what appears in Figure 2:

Figure 2: Dow Jones Industrial Average weekly, and three market declines, 1970-2008, along with the 12-26 week MACD
expressed in points.
The three events shown in Figure 2 are the 1973-1974 bear market, the stock market crash of October 1987, and the
recent (October 2007-March 2008) market correction. The worst extent of the price declines (based on weekly closes) is
labeled.

Clearly, in terms of price decline, the recent correction is far milder than the other two historical events.

However, the decline in MACD was far more dramatic in 2008 than in 1987 or 1974. The reason is that
themoving average formulas use price data, so a 100-point decline in the Dow Industrials can produce roughly the same
point change in an exponential moving average regardless of whether the starting price is 1000 or 10,000.
What matters is not the general level of stock prices, but only the number of points that separate the stock price and its
moving average. However, as equity investors, we are usually more interested in percentagechanges than in point
changes. (Futures traders may not agree.)

Fortunately, a simple additional calculation can create a MACD that reflects percentage changes so that the market action
that occurred in disparate price ranges can be compared.

In order to normalize MACD, simply divide the original reading by the slower moving average.

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In order to avoid confusion between the two different formulas, we will refer to the MACD in % calculated by equation 2 as
"MACD%". If we utilize the formula for MACD% on the price history in Figure 2, we get the more consistent result that
appears in Figure 3, where the magnitude of the moves in MACD% parallels thepercentage changes in price.

Signals that have been correct 85% of the time

Now that we are in a position to compare MACD% readings from the 1970s (when the Dow Industrials peaked around
1000) and the current decade (where the Dow peaked at 14,000) we can see that the 12-26 week MACD% reached a
major long-term oversold level when it got down to -3% or below.

That has only occurred seven times in the past 38 years. When MACD subsequently climbed back above -3%, it was a
good time to enter the market on all but one of these occasions (November 2001).

The market correction that has carried into 2008 has not brought the 12-26 week MACD% of the Dow Industrials down as
far as -3%. If it does, we would consider the subsequent recovery to be a good time to take new positions.

Figure 3: Dow Jones Industrial Average (1970-2008) with the 12-26 week MACD expressed as %. Vertical dashed lines
indicate the seven occasions when MACD% climbed from below to above -3%. The 1973-1974 bear market, crash of
1987 and 2007-2008 market correction are labeled A,B,C (respectively) as in Figure 2.
The concepts discussed here are covered in more detail in Gerald Appel's book, "Technical Analysis: Power Tools for
Active Investors" (2005).
Gerald Appel is the President of Signalert Corporation of Great Neck, New York, an SEC-registered investment advisory
firm. He is the inventor of the MACD and the author of a number of groundbreakinginvestment books, the most recent of
which is Beating the Market Three Months at a Time (2008), which he co-authored with Marvin Appel.
Marvin Appel is the CEO of Appel Asset Management Corporation, also an SEC-registered investment advisory firm in
Great Neck. He is a renowned expert in exchange-traded funds and the editor of the well-regarded investment newsletter
Systems and Forecasts. For more information about the material discussed in this article, please
visit www.systemsandforecasts.com.

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MACD Histogram
MACD
1. MACD Defined
2. Moving Average Crossovers
3. MACD Histograms
4. MACD Divergences

The MACD Histogram is simply the difference between the MACD line (blue line) and the MACD signal line
(red line). The MACD histogram is illustrated in the chart below of the Nasdaq 100 QQQQ's:

Two important terms are derived from the MACD histogram and are illustrated above in the chart of the
QQQQ's:

• Convergence: The MACD histogram is shrinking in height. This occurs because there is a change
in direction or a slowdown in the stock, future, bond, or currency trend. When that occurs, the
MACD line is getting closer to the MACD signal line.
• Divergence: The MACD histogram is increasing in height (either in the positive or negative
direction). This occurs because the MACD is accelerating faster in the direction of the prevailing
market trend.

When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase
in height. When the MACD histogram does not increase in height or begins to shrink, the market is slowing
down and is a warning of a possible reversal. The graph below of the E-mini Nasdaq 100 Index Future
shows this phenomenon:

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The letter "T" represents when the top or peak of the MACD histogram occurs. In contrast, the letter "B"
shows when the bottom of the MACD histogram occurs. Notice how closely the tops and bottoms of the
MACD histogram are to the tops of the Nasdaq 100 e-mini future.

MACD Histogram Buy Signal


When the MACD histogram is below the zero line and begins to converge towards the zero line.

MACD Histogram Sell Signal


When the MACD histogram is above the zero line and begins to converge towards the zero line.

Note: In the example above, three consecutive days of shrinking MACD histogram from top or bottom
served as the buy or sell signals shown with arrows. This is an agressive example. One could wait until the
MACD histogram went to zero, but that would be the same signal as the MACD moving average crossover.

The MACD is not only good for buy and sell signals, the MACD can be used for warnings of potential
change in the direction of stocks, futures, and currency pairs.

INVESTMENT EDUCATORS

Free Charting Lesson

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In the above chart, we have what is known as a "Double Bottom" pattern. To an alert trader,
this particular pattern makes for an easy profit. It is also one of the safest patterns to trade.
Let's dissect what is going on here, step by step.

First, we drew a trendline across the tops as soon as two lower highs were made. Typically, in
an established trend, a market will bump up against such a line three or four times before
reversing.
Next, we analyze the pattern. Focus on the downswing. In this instance, the price was
contracting as it was making its descent. The size of bars on the price chart was smaller
than the bars of the previous downswings. Normally, there will be five "legs" in the
downward progression, and then we will see the reversal. It quickly becomes apparent that no
new lows are being made at the first leg of the Double Bottom. So, we look for a counter-
trend rally --- and we get one! With it, there is a penetration of the trendline. This is a major
piece of information!
What comes next is the clincher that tells you that the trend is changing. Price comes back
down and touches the trendline, but is unable to make a closing price beneath it.
Since the pattern spells a reversal in trend, we then look to Stochastics to confirm what we
think will happen. Stochastics, which was developed here at Investment Educators by our
own George Lane, is a momentum oscillator. Its function is to detect changing velocity in
trends. Take a look at the first bottom that the pattern made…the one before the trendline was
first penetrated. Look where Stochastics was at the time. Next, look at where the retest of the
low was made and observe where Stochastics was at the time of the retest. The second low on
Stochastics was higher than the first low on Stochastics, while the price was making equal
lows. This is called convergence. Convergence indicates that the momentum has sufficiently
changed to predict a reversal in trend. It confirms that the bottom has been made.

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On the way up, it quickly becomes apparent that this is a strong, uptrending market. This
market is in a hurry to go someplace and we can know this by looking carefully at the size of
the "reactions, or "countermoves" that it makes on its way up. They are very small and short-
lived. This indicates the aggressiveness of the bulls.
Catching a strong trend like the one shown is what traders live for. They don't come like that
every day, so we like to stay in them as long as possible. To accomplish this, there are
methods available that will assist us in determining how far a market can go in one direction
before correcting again. Elliott Wave is one method that can do this with awe-inspiring
accuracy, so we teach it along with Stochastics in our 2-Day Seminar!
We hope you have enjoyed this lesson. Good luck and good trading!
……………………………………………………………..
MACD is a trend velocity indicator developed by Gerald Appel in the 60' and is
constructed as a center line velocity oscillator. The Moving Average Convergence
Divergence indicator is a popular indicator that is available everywhere.

What MACD does: the formula plots the point spread between 2 different Exponential
Moving Averages--a slower and faster one. This is the first line. Then a second
Exponential Moving Average is plotted against the first. MACD can also be
constructed as a histogram. MACD histogram is often easier for novices to use.

Professional market technical analysts agree that MACD requires experience and
judgment to use as Appel intended. Gerald Appel doesn't recommend its use as a
purely mechanical indicator. The most common problem traders experience when
using the moving average convergence divergence indicator is frequent whipsaws
which may cause chronic small losses. To find out how you can improve how you
use MACD, please watch the free MACD lesson.

Today we have a very dynamic, energetic, and often volatile market that is dominated
by institutional traders who do swing trading, day trading, selling short, hedging and
more. It is important to include all 3 pieces of market data on your stock analysis.
To find out more, please watch the free MACD lesson.

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