122 Martin Pring on Market Momentum

The MACD Indicator

MACD stands for “Moving Average Convergent Divergent" method. Th/s

method is simply another way of expressing a trend-deviation oscillator.
The system obtains its name from the fact that the two moving averages
used in the calculation are continually converg ing with and diverging from
each other. Normally, the two averages are calculated on an exponential
basis. Chart 5.12 represents both a figure and marketplace example for the
gold price combined with a 9- and 15-day EMA. The top panel in chart 5.12
shows the relationship between the two averages, but this time the closing
price has been eliminated. The lower panel shows the osciffator derived
from the division of the 9-day by the 15-day average. This oscillator is the
MACD.
The zero line represents those periods when the two EMAs are
identical. When the MACD is above the equilibrium line, the shorter
average is above the longer one and vice versa. The dotted line represents
a 15-day EMA of the MACD and is known as the signal line. It gets this
name because MACD crossovers generate buy and sell signals. In my
experience I have not found these crossovers to be particularly reliable,
and I regard them as overrated. I prefer to use the MACD from the point of
view of trendline violations, or even price-pattern construction. Another
possibility is to use the MACD signal-line crossovers as an alert that
smoother oscillators based on a longer time span may be poised to give a
signal. In this respect I am thinking specifically about the short-term KST
constructed from daily data. The KST indicator is discussed in chapter 7.
Obviously, an MACD can be constructed from many different
combinations. Gerald Appel of Signalert, arguably its chief proponent. has
done a substantial amount of work on the indicator. He recommends a
combination of 8- , 17- . and 9-day EMAs, but he believes that sell signals
are more reliable using a 12-25-9-day combination. His belief is interesting
because the “selling** MACD contains a longer time span. This reiterates
the point made in an earlier chapter: namely, that markets spend more time
in a rising than in a falling mode. The longer time span effectively delays
the sell indications, thereby making them more timely.
Charts 5.13 and 5.14 show some examples of MACD indicators in the
marketplace. Here the calculation for the MACD is made by