The Moving Average Convergence/Divergence is a momentum oscillator developed by Gerald Appel. It is the difference between a 12 period and a 26 period Exponential Moving Average plotted usually as a histogram above (difference is positive) or below (difference is negative) the zero line. A 9 period Simple Moving Average of MACD is known as the Signal Line.
MACD follows the general rules of oscillator analysis:
- Confirmation of the trend is in place when MACD crosses the zero line.
- Early Buy signals (or reversal warning) are triggered when MACD crosses above the Signal Line when below the zero line.
- Early Sell signals (or reversal warning) are triggered when MACD crosses below the Signal Line when above the zero line.
- Overbought/Oversold signals are triggered when the 12 period EMA pulls away from the 26 period EMA.
- MACD is unbounded and as such, there no overbought and oversold lines.
- Divergence follows the rules for positive and negative divergence.