The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average [EMA] from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line,” is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

There are three common methods used to interpret the MACD:

1. Crossovers – When the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum.

The S&P 500 at the end of Feb 2007

• bearish crossover signal
• Support level of 1440.00. has broken down
• S&P 500 move upwards as the MACD moves downwards

Figure 1: SPX Feb 07
click here for more detail

2. Divergence – When the security price diverges from the MACD. Divergence is considered either positive or negative. Positive divergence occurs when an indicator moves higher while the security price is declining and negative divergence occurs when the indicator moves lower while the security is rising. Generally, this signals the end of the current trend.

Let’s take a look at the weekly S&P 500 at the end of Sept 2000, where it clearly shows negative momentum divergence. This signal is confirmed when the Index breaks through the support line signaling the end of the current trend. (Label A, directly above the red circle). The S&P 500 continues its move downwards until we see a change in momentum (Label B) around March 2003 (Security makes lower lows as the MACD indicator makes lower highs).

Figure 2: SPX Sept 2000
click here for more detail

3. Dramatic rise – When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels.

ProfitSource users will find that the MACD gives traders an edge on trend analysis and sheds light on the momentum of the securities under study.

Optionetics Staff
Optionetics.com ~ Your Options Education Site

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