If you plot the Percentage Price Oscillator (PPO - 12,26,9) on an index or individual stock chart next to the MACD (12,26,9), you'll find that they appear to be identical. Let's use Wynn Resorts (WYNN) as an example. Below I show how both the PPO and MACD are calculated:
At first glance, both the MACD and PPO look the same. The primary difference in these two indicators is that the MACD is based on the difference between the 12 day EMA and the 26 day EMA expressed in DOLLARS, while the PPO expresses this difference in PERCENTAGES. It's impossible to compare the relative momentum of two stocks with varying prices using the MACD. Why? Because higher dollar stocks will have higher dollar differences between its 12 day EMA and 26 day EMA. The PPO, however, is perfect to make that comparison because it's based on percentages instead.
I find that using long-term positive and negative divergences on the MACD is a powerful tool to identify potential reversals in stocks and indices. But I do have exceptions to this general rule. When the MACD hits a certain percentage relative to the underlying price of the stock or index it's tracking, there is a mathematical certainty the MACD will reverse regardless of price action. The PPO helps you avoid such stocks because the momentum is expressed in percentages. Divergences that arise from this type of price action should be ignored in my opinion because it's not necessarily indicative of slowing momentum. Here's an example:
There's a lot of information on the PPO here at StockCharts that you should review. Be sure to check out the Chart School. The PPO is an excellent complement to the MACD if that's an indicator you frequently use. But you need to understand the subtle differences in order to apply it to your trading. At Invested Central, we regularly host a monthly educational webinar to discuss a trading topic. This month I will be discussing the PPO, including the combined use of the MACD and PPO to find trading candidates with slowing momentum. This is Invested Central's one year anniversary of our Online Traders Series and we're making a special offer for ChartWatchers' readers. CLICK HERE for more details.
For those wanting more information on various trading topics, we offer a FREE Boot Camp e-mail series. CLICK HERE for registration.
Happy trading!
