MACD technical analysis uses moving averages, creating a momentum oscillator by subtracting the longer term moving average from the shorter term moving average. In the end you get a line that crosses above and below zero without any limitations on the up or downside. Usually the MACD incorporates a 26 day and 12 day exponential moving average (EMA). 26/12 is the most common combination used by the experts where 26 day EMA is slower and 12 day EMA is faster.

Calculation of MACD

The MACD value can be calculated by simply deducting the longer EMA from the shorter EMA. This value oscillates around a zero point, zeros being where the 26 day EMA is identical, and therefore (usually) crosses over the 12 day EMA.

MACD = EMA (12) – EMA (26)

Once the MACD has been calculated, a 9 day Exponential moving average of the MACD value is then calculated. This value is then plotted and is known as the signal line (EMA (9)).

Purpose of MACD

When the MACD for a stock is positive, it means that that price trending in the long term for that stock is bullish. If the MACD is negative, long term outlook is bearish. It the MACD crosses the signal line; it means that the trend is changing. For example, you can see when the MACD crosses line for Citigroup (C), General Electric (GE) or Intel (INTC)

Characteristics of MACD

The MACD is:

MACD is a lagging trend deviation indicator using two EMAs as method of deviation.

• It is best when used as a technical indicator for long-term trends.
• It is plotted with stock trading software as a smooth series, ignoring insignificant price variation.
• Subject to whipsaw, often leading to poor market timing.

MACD interpretation

Analysts who follow MACD technical analysis use the following guidelines:

When the MACD crosses over from below the signal line and rises above the signal, this is a sign to buy. Conversely, when the MACD crosses over from above and drops below the signal, this is a sign to get rid of the stock.

• If the MACD crosses the zero point and moves from below zero to above zero, this is a buy signal and vice versa.
• In sideways trending markets, there may be numerous cross-overs, thus making interpretation unreliable. MACD buying signs are best used in a generally up trending stock or market.
• The signs to buy or sell are stronger if the movement up or down is sharp.

Related posts:

1. Technical analysis of stocks
2. Technical analysis of stock trends – Volume, Aroon and Fibonacci
3. Stock Analysis for beginners – Stock Analysis Techniques