CHAPTER 7

FIN555
Introduction to
Technical Analysis
THE MOMENTUM INDICATOR
(MACD)
7.0 Introduction

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7.0
Introduction
Let’s start our first set of slides

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 The Momentum Indicator (MACD)

The moving-average This average is known as

convergence divergence the “signal line,” the
(MACD) trading method crossovers of which
The two MAs are usually
is form of trend- generate buy and sell
calculated on an exponential
deviation indicator signals. It obtains its name
basis in which more recent
using two exponential from the fact that the two
periods are more heavily
moving averages, the EMAs are continually
weighted than in the case of a
shorter being subtracted converging and then
simple MA. It is normal for the
from the longer. diverging from each other.
MACD to then be smoothed by a
third exponential moving average
(EMA), which is plotted separately
on the chart.

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 The Momentum Indicator (MACD)

The MACD has gained great

popularity over the years, but
in effect, it is really just another
variation on a trend-deviation
indicator that employs two
EMAs as its method of
deviation. A visual of its
construction is therefore very
similar to Chart 14.13.

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 The Momentum Indicator (MACD)

The MACD often works well

with monthly data. In this
respect, we look at the CRB
Spot Raw Industrial
Commodity Index in Chart
14.19, where the solid arrows
indicate good primary-trend
momentum buy signals.

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 The Momentum Indicator (MACD)

The chart shows a classic

head-and-shoulders pattern.
Note that the MACD histogram
gradually became weaker as
the pattern progressed.

This was only a short-term sell

signal, but the price eventually
fell below the signal level.

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Thanks!
Any questions?