The purpose of this Market Call section is to educate readers in technical analysis patterns and indicators. As with all investment information, you need to research information and consult your financial advisor before initiating any strategies that are contained in Market Call.

Also, you must realize that as with all trading strategies, opinions can change quickly depending on market conditions and developments.

This column tries to present historical examples, potential set ups, and examples of entry and exit strategies.

Also, you must realize that as with all trading strategies, opinions can change quickly depending on market conditions and developments.

This column tries to present historical examples, potential set ups, and examples of entry and exit strategies.

Using MACD to signal a turn in trend.

The MACD indicator that is used every day in this column can also be used as a leading indicator to help a trader pick turning points. Let's review what MACD is and look at an example.

The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between three moving averages of prices.

This method can be used for any time frame. It could be 5 minute bars, 15 minutes bars, 60 minute, or daily bars. Many traders will also trade in multiple time frames using a longer time frame for trend, and the shorter period for entry and exit.

The MACD is the difference between a 26-period and 12-period exponential moving average. A 9 period exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. On the charts below, the MACD line is the green colored line, and the trailing, slower moving line is the signal line. Some technical analysis programs will show the MACD as a histogram bar.

There are three popular ways to use the MACD: crossovers, overbought/oversold conditions, and divergences.

The most common use is as a crossover method. Using this interpretation, the trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. Some traders will use MACD as an overbought and oversold indicator. When using the indicator in this manner, when the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions vary from security to security. The other way some traders use MACD is to spot divergences from an anticipated movement. Since there are no indicators or patterns that work all the time, reactions against the anticipated move can signal a major move. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

The moving average crossover method calculates two moving averages, each based on a different number of periods of trading data. When the shorter-term (fewer periods) average crosses above the longer-term average from below, this is a buy signal. When the shorter-term average crosses below the longer-term average from above, this is a sell signal.

Let's look at International Business Machines, IBM.

On July 26, 1999 I wrote -

"Since MACD is momentum based, it can provide a false signal in the first signal. I find that waiting for price confirmation of the indicator, helps me to have a higher percentage of winners. We can see an example of this with the July 6 sell signal that occurred while prices were still moving up. This would not be taken as price did not confirm the indicator.

However, the July 13 signal was quickly confirmed by declining prices and the signal should have been taken. Prices declined and the signal was profitable. For a new trend reversal we look at the current action. A July 21 signal when it looked like a possible base was forming was not confirmed by price.

On Friday, July 23, IBM flashed another possible Buy signal. If we can get a continuation of upward prices at the opening on Monday, I would take this signal. Notice also how Volume may have shown us a panic selling climax and now that the selling is done, we may be set up for a reversal in trend. Momentum has turned up as well as OBV.

I would Buy IBM on any continued rise in price. This trade may be entered by entering a Buy Stop order at 126, or entering if IBM hits 126 on Monday. I would place my stop at 123 � if filled." This trade failed and a trader would have been stopped out."