Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence or MACD was developed by Gerald Appel during the 1970s. MACD is a lagging indicator because it measures the difference between the two moving averages and becomes into a momentum oscillator as it fluctuates above and below the zero line. The indicator is unbounded; thus, it is not useful for identifying overbought and oversold levels.

Conventionally, MACD is computed by taking the difference between a security’s 26-day period (slow) and 12-day period (fast) exponential moving averages of closing prices. A positive MACD denotes the 12-day EMA is above the 26-day EMA. A negative MACD indicates the 12-day EMA is below the 26-day EMA.

A 9-day EMA of MACD is also plotted on the chart to act as a trigger line for buy and sell signals. When MACD moves above its 9-day EMA, a bullish crossover occurs which may indicate an upward trend in price. When MACD moves below its 9-day EMA, a bearish crossover occurs which may indicate a downward trend in price.

The S&P 500 Index Pit chart shows the MACD as the blue line and its 9-day EMA is the black line. The histogram provides the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA; the histogram is negative when MACD is below its 9-day EMA.

If MACD is positive and rising, this means that the rate-of-change of the faster moving average is higher than the rate-of-change of the shorter moving average. Thus, positive momentum is increasing and this would indicate to be a bullish signal. If MACD is negative and falling, rate-of-change of the shorter moving average is higher than the rate-of-change of the faster moving average. Thus, negative momentum is surging and this would indicate to be a bearish signal. There are times when MACD crosses the zero line, which is known as the centreline.

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