The MACD 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 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-day and 12-day 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 is shown as a histogram. The
trailing, slower moving line is the signal line.
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.
Let’s look at Cirrus Logic (NASDAQ: CRUS).
The MACD indicator flashed a Buy signal on August 28 when CRUS was 28 1/2.
CRUS moved up nicely and then flashed a MACD Sell signal.
Over the past few days, CRUS did move down, but now looks to be forming a
base and the MACD is now signaling a Buy.
When you combine this with moving averages and a break up from this
congestion area that CRUS is in over the last couple of days, you have the
potential for a nice breakout and a move over the next couple of days above
the most recent high of 35.
I would Buy CRUS on a break up to 33 5/8. I want to make sure it is moving
up and not breaking down from this congestion pattern.
If CRUS actually broke down below 32, I would short the stock.
On the anticipated breakout with a Buy at 33 5/8, I would place my stop at
32 �.
If CRUS did breakdown below 32, I would short the stock with a stop at 33 �.
