The MACD : A Guide to This Powerful Momentum Gauge

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When I discuss technical analysis in articles and podcasts, I often examine the moving average convergence/divergence indicator, better known as the MACD, or colloquially as the Mac D.

The MACD is one of my favored technical indicators to help forecast prices and manage risk. Accordingly, let's learn more about the MACD to see how it detects trends and potential trend changes, and assesses momentum.

It's important to stress that the MACD is just one of many technical and fundamental tools I use to review current or potential investments. There is no such thing as a perfect technical indicator. However, when a handful of trusted indicators give you a similar outlook, the odds of success are much better. As you will see later in this article, the MACD of the S&P 500 has given plenty of wrong signals that, if followed without appreciation for other technical indicators and patterns, would have been costly.

The math behind the MACD

The MACD is the difference between a short moving average and a longer moving average. The MACD line tells us if there is a trend in place. Moreover, if a trend is in place, it tells us if its momentum is increasing or decreasing.

For the daily MACD, it's common to subtract the quicker 12-day moving average from the slower 26-day moving average. Additionally, a nine-day moving average, called the signal, is plotted alongside the MACD to detect momentum changes and potential trend reversals.

Sometimes, a bar chart is included to highlight momentum. The bar chart plotting the difference between the MACD and the signal shows whether the MACD converges toward or diverges from the signal line.

It's worth adding that most technical practitioners use an exponential moving average (EMA) instead of a simple moving average. An EMA gives more weight to recent price data, whereas the simple moving average weights all data equally.

  • MACD: 26-day moving average minus 12-day moving average
  • Signal: nine-day moving average of the MACD
  • Momentum: MACD minus signal

Before moving on, I share a year-to-date graph of the S&P 500's MACD, signal line, and the convergence/divergence bar chart. The price of the S&P 500 is not included, allowing you to focus solely on the MACD.

S&P 500 MACD