That brings me to the MACD. Let's start with the definition. The MACD is the difference between any two moving averages. Are they converging (moving closer together) or diverging (moving further apart)? It gives us a sense of momentum in an underlying stock or index. The "standard" MACD is the difference between the 12 period EMA and the 26 period EMA. StockCharts allows the printing of a simple chart to provide the calculation. Check out this S&P 500 daily chart:
As prices move higher or lower, it's very typical for the shorter-term moving average to change more abruptly in the direction of price. But after a period of rising or falling prices, the difference between these moving averages begin to "converge" and that's the signal that momentum is shifting. While many technical indicators lag, the long-term positive and negative divergences that form on the MACD actually precede trend reversals. Last Tuesday, we issued three stock setups and one was flashing a buy signal based on a long-term positive divergence that had formed. Take a look below at the result since:
There are definitely rules to follow when buying a stock with a positive divergence or selling one with a negative divergence. If you're interested in divergences and would like to learn more about them, feel free to join me on Tuesday, July 27th as I lead the fourth in our monthly Online Traders Series events. CLICK HERE for more details on this event and for additional trading candidates with long-term positive divergences currently present.
We are also featuring another stock with a powerful long-term positive divergence in place as our Chart of the Day for Monday, July 26. CLICK HERE for more information.