The Moving Average Convergence / Divergence (MACD) is another form of technical analysis useful to any stock trader. By understanding MACD investors can get a better idea of whether a stock they hold, are watching, etc. is overbought or oversold.
The Moving Average Convergence / Divergence (MACD) was developed by Gerald Appel. MACD uses moving averages, creating a momentum oscillator by subtracting the longer moving average from the shorter moving average. In the end what you have is a line that crosses above and below zero without any limitations on the up or downside.
The most popular form of the MACD incorporates the 26-day and the 12-day Exponential Moving Averages (EMAs). If you look at any reputable trading programs or books, they almost always utilize the 26/12 combination. The 12 day EMA is the faster, with the 26 being the slower.
This difference plotted as a line is then compared to the 9-day EMA which acts as the trigger to symbolize a bullish or bearish crossover. A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish is when MACD moves below its 9-day EMA.
With this chart of Microsoft (MSFT) we can see how the two lines interact with one another. The black line is the difference between the 12 and 26-day EMAs and the red line is the 9-day EMA.
Implying what we read above, you can see that when the 12/26 difference was above the 9-day EMA, the stock trended upwards (which was the middle of March through the middle of May). On the contrary, we can see how the stock trended downwards when the 9-day EMA was above the 12/26 difference (February – mid March).