MACD - Interpretation

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 – EMA = 0
• Sign (relative price extremum_final – relative price extremum_initial) ≠ Sign (relative MACD extremum_final – MACD extremum_initial)