The moving average convergence divergence, or MACD, is one of many tools in the arsenal of a technical trader. Developed in 1979, it remains a popular, if often misunderstood indicator. There are several different elements to the MACD, which is one reason for confusion. The indicator charts the 12-day and 26-day exponential moving averages, and uses a histogram to reflect the difference between these two lines.
Watch for divergence. The most potent use for MACD is to spot divergences in price action. A divergence occurs when the trend in the MACD and actual price begin to move in opposite directions. For example, if a down-trending stock makes a new low in price, but while MACD does not reach new lows and actually moves upward, this is a positive divergence and suggests a buying opportunity. The opposite would be a negative divergence and suggests a chance to sell.
Spot centerline crossovers. The centerline, or zero-line, is the place where the difference between the fast and slow moving-average lines is nil. When the MACD lines move from negative to positive through the centerline, this is a bullish indication. A move from positive to negative suggests momentum has shifted and indicates continued weakness in price.
Confirm divergences with moving-average crossovers. A moving-average crossover is similar to a centerline crossover except that it occurs when the fast-moving line crosses over the slower-moving line. Because this can happen frequently, it is not considered a reliable indicator on its own. But, such crossovers are important in confirming positive and negative divergences. For example, a bullish moving average crossover occurring after MACD indicates a positive divergence is considered a reliable indication that a positive change in trend is about to occur.