Interpretation
Exponential moving averages highlight recent changes in a stock's price. By comparing EMAs of different lengths, the MACD line gauges changes in the trend of a stock. By then comparing differences in the change of that line to an average, an analyst can identify subtle shifts in the strength and direction of a stock's trend. Traders recognize three meaningful signals generated by the MACD indicator. When: the MACD line crosses the signal line the MACD line crosses zero there is a divergence between the MACD line and the price of the stock or between the histogram and the price of the stock
Graphically this corresponds to: the blue line crossing the red line the blue line crossing the x-axis (the straight black line in the middle of the indicator) higher highs (lower lows) on the price graph but not on the blue line, or higher highs (lower lows) on the price graph but not on the bar graph
And mathematically: MACD signal = 0 EMA[fast,12] EMA[slow,26] = 0 Sign (relative price extremumfinal relative price extremuminitial) Sign (relative MACD extremumfinal MACD extremuminitial)
[edit]Signalline
crossover
Signalline crossovers are the primary cues provided by the MACD. The standard interpretation is to buy when the MACD line crosses up through the signal line, or sell when it crosses down through the signal line. The upwards move is called a bullish crossover and the downwards move a bearish crossover. Respectively, they indicate that the trend in the stock is about to accelerate in the direction of the crossover. The histogram shows when a crossing occurs. Since the histogram is the difference between the MACD line and the signal line, when they cross there is no difference between them. The histogram can also help in visualizing when the two lines are approaching a crossover. Though it may show a difference, the changing size of the difference can indicate the acceleration of a trend. A narrowing histogram suggests a crossover may be approaching, and a widening histogram suggests that an ongoing trend is likely to get even stronger. While it is theoretically possible for a trend to increase indefinitely, under normal circumstances, even stocks moving drastically will eventually slow down, lest they go up to infinity or down to nothing. [edit]Zero
crossover
A crossing of the MACD line through zero happens when there is no difference between the fast and slow EMAs. A move from positive to negative is bearish and from negative to positive, bullish. Zero
crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover. [edit]Divergence The third cue, divergence, refers to a discrepancy between the MACD line and the graph of the stock price. Positive divergence between the MACD and price arises when price hits a new low, but the MACD doesn't. This is interpreted as bullish, suggesting the downtrend may be nearly over. Negative divergence is when the stock price hits a new high but the MACD does not. This is interpreted as bearish, suggesting that recent price increases will not continue. Divergence may also occur between the stock price and the histogram. If new high price levels are not confirmed by new high histogram levels, it is considered bearish; alternatively, if new low price levels are not confirmed by new low histogram levels, it is considered bullish. Longer and sharper divergencesdistinct peaks or troughsare regarded as more significant than small, shallow patterns.
