The "MACD" is a trend following momentum indicator that shows the relationship between two moving averages of prices. To Calculate the MACD subtract the 26-day EMA from a 12-day EMA. A 9-day dotted EMA of the MACD called the signal line is then plotted on top of the MACD.

There are 3 common methods to interpret the MACD:
1. Crossovers - When the MACD falls below the signal line it is a signal to sell. Vice versa when the MACD rises above the signal line.
2. Divergence - When the security diverges from the MACD it signals the end of the current trend.
3. Overbought/Oversold - When the MACD rises dramatically (shorter moving average pulling away from longer term moving average) it is a signal the security is overbought and will soon return to normal levels.

Most people use the crossover to try an interepet what a stock is going to doing. If I see a MACD crossover I study the volume. I then put it on my watch list. Volume is a big key in reading most indicators.

Moving Average Convergence Divergence (MACD)

An important observation to make on a stock you are considering for investment is whether it exhibits a tendency to trend. Being able to identify those stocks will make you much more successful in your investing. Many market technicians believe that it is easier to make money in stocks that trend than in stocks that fluctuate up and down. The price action of a stock can generally be categorized as either trending (moving generally up or down) or range bound (sideways). Trending stocks are going somewhere in a vertical direction, while range-bound stocks travel in a horizontal direction.

A trend is said to exist when prices keep rising or falling over time. In an up trend, each rally penetrates a higher price level than the prior rally, and each retracement (fall) stops above the previous highs. It's like climbing or descending a set of stairs.

The MACD lines (red or fast line and the white or slow line) are moving averages, one faster than the other. When one line crosses the other, it can represent the earliest indication of a possible change in trend. However, the MACD lines cross over each other frequently as they try to establish the trend, so it's often best to wait for a stronger confirmation. When the lines cross over the centerline, it indicates that a trend has been established and may be sustained for some time, according to Gerald Appel, the inventor of the MACD indicator. The longer the MACD lines stay above the centerline (below for bearish conditions) the more likely the trend may be sustained according to the MACD analysis.

The idea behind the Cross Up at Center play is finding stocks where a potential new up trend has been identified. This happens when the MACD line crosses up through the centerline. There's no guarantee a stock will keep ascending - in fact, you'll likely want to add more criteria to whittle down your prospects. But as triggers and indications go, this is a good one, especially with increasing volume.

Potential Entry Points

Consider screening for stocks with the MACD line crossing up through the centerline, with average trading volume of at least 100,000, and with today's trading volume 100% or more than the one-month average volume. Gerald Appel who created the MACD indicator advises investors to look for MACD patterns that have started to reverse after a downtrend. MACD patterns that vacillate near the centerline may not be as favorable, as they are more likely to be range bound.

Potential Exit Points

For the trend to end, the MACD lines must penetrate the centerline and start tracing below it in negative ground, states Appel. You may want to wait for the MACD lines to dip below the centerline before getting completely out. Alternatively, you might want to set Alerts for bearish crossings of the 10- and 50-Day Moving Average lines and evaluate at each event.

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