Now that you are familiar with moving averages, you are then ready for a slightly more complex indicator called a MACD. MACD stands for Moving Average Convergence Divergence, and is another system that uses moving averages.

Moving averages are what we call lagging indicators. This is because a change in the moving average will always lag behind the price movement. Gerald Appel took these moving averages and converted it into what is called an oscillating indicator. This is simply something that moves back and forth around a centre or zero line. Lets have a closer look at a MACD chart below.

As the stock becomes bullish, the MACD starts moving to the up side of the graph. When the stock becomes bearish, the MACD moves to the down side of the graph. The MACD is also more sensitive than a single moving average, and identifies a possible up or downtrend before the 30 day moving average.

To calculate a MACD, we first calculate a 12 and a 26 day exponential moving average. We will not go into exponential moving averages except to say that they are similar to the moving averages that you have been introduced to. Next, calculate the difference. This is the MACD value, but is not what we plot on the chart. To get the histogram we see in our charts, we then take a 9 day exponential moving average of the MACD value. We then take the difference between the MACD and the 9 day average and plot this as the bar graph. This is what is called a 12, 26, 9 MACD. When the bar graph is pointing up, then the stock is bullish. If the bar graph is pointing down, then the stock is bearish.

Now consider a stock which closes at the exact same price for a month. The 12 and 26 day moving averages will be the same. The difference between those moving averages is 0, so our MACD graph will not have a bar going up or down, as it will also be 0. As the price starts moving upwards, the 12 day moving average will move up faster than the 26 day moving average. The two lines on a graph would diverge from each other and the size of the bars will increase. We can see this in our example. The price goes up and the bars on the MACD get larger.

As we near the top on this rally, the 26 day moving average starts to catch up to the 12 day moving average. The moving averages start to converge on each other. We can see this after the first bullish run in our example. The price rallies strongly then starts to level out for a few days. This causes the moving averages to converge on each other, so the difference between them is not as big. The MACD bars now start to get smaller. When you see this happening, it can be a useful early warning that a short term trend is about to reverse. When the histogram bars cross to below the zero line, then this is a confirmation that the share price is currently bearish.