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Strategies & Market Trends : Analysis Class for Beginners

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To: Mary A Young who wrote (836)	6/9/1998 11:57:00 PM
From: Trader X	Read Replies (4) of 1471

Mary, an answer to your MACD question. <<trying to understand MACD>> I disagree with Tang -- MACD is a very useful leading indicator for predicting turning points...buy and sell signals. Trendlines alone will help you only so far. MACD stands for "moving average convergence/divergence." This is an oscillator based on exponential moving averages. The standard formula subtracts the difference between a long term (26 week) and short term (12 week) exponential moving average. This difference is then made into another moving average (9 week) before display. click here for an example: chart2.bigcharts.com:80/chart?time=7&freq=1&uf=0&lf=4&type=4&style=3&size=3&compidx=aaaaa&symb=kr&comp=&maval=10&state=0&ma=3&r=chart&onbad=badsymbol&country=us&sid=2783&sec=c&xyz=53998859&s=16667 As with all oscillators, look for a divergence from the price pattern and trend within the oscillator. In the example above, KR made a price low near $40 about May 15, but the oscillator was making higher lows from late April to mid-May. This is what's called a "divergence", when the oscillator pattern and price pattern diverge from each other. It's a very reliable short-term forecast for price trend changes. In the same example, higher prices from Feb to April was being met by a diverging MACD which was making progressively lower highs. Could a trendline alone have gotten you into the stock as soon as the MACD? Possibly. The mid-May low held support at the trendline going back to Sept '97. chart2.bigcharts.com:80/chart?time=9&freq=1&uf=0&lf=4&type=4&style=3&size=3&compidx=aaaaa&symb=kr&comp=&maval=10&state=0&ma=3&r=chart&onbad=badsymbol&country=us&sid=2783&sec=c&xyz=54613968&s=25256 But the MACD was valuable as confirmation. It's important to have confirmation in T/A, and that is the reason people look at a multitude of indicators, rather than simply "trendlines". Trader X

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