MACD, which stands for Moving Average Convergence/Divergence, is a tool used to determine momentum in a securityor index. To calculate the indicator you subtract the 26 day Exponential moving average (EMA) from the 12 day Exponential moving average (EMA). In essence, this allows the investor to see if the faster moving average (12) is above or below the slower moving average (26). Additionally, a 9 day EMA of the MACD is plotted to identify trade signals. With the MACD and the 9 day EMA, there are various ways to generate trade signals including crossovers and divergences. At Pinnacle, we typically monitor the MACD of the S&P 500 to assess the momentum in the broad market.
This chart is from 4/9/09 to 4/9/10. The S&P 500 is shown in the top panel along with the 12 day EMA in pink and the 26 day EMA in green. So when the MACD is created, which is the white line in the bottom panel, it is above 0 because the 12 is higher than the 26. The 9 day EMA of the MACD is also plotted in the bottom panel with a red line. With the index, the indicator and the trigger line plotted we can now assess the momentum in the market.
The first concern is the negative divergence between the S&P 500 and the MACD as indicated by the two white arrows. The S&P 500 is continuing to make new highs while the MACD is starting to rollover. The second concern is the MACD is starting to crossover the 9 day EMA to the downside which would be an additional sell signal. The last time a negative crossover occurred was right at the January peak so we will be keeping an eye on this indicator.
