Tuesday, November 18, 2014

The Dow and the MACD indicator

Question: “Looking at the weekly chart for the Dow, I see some negative divergence between the index and the MACD.  Do you see a cause for concern here?”

Answer: There are a couple of things to remember when looking at the MACD indicator.  One of them is that the MACD is more reliable at bottoms than at tops.  MACD is also not a consistently reliable indicator as a standalone, although it can be used to confirm technical bottom – and occasionally top – signal when used in conjunction with other indicators.

To reiterate, the MACD gives its best signals when it's confirmed by numerous other technical indicators (i.e. weight of evidence).  I’d also point out that while the weekly MACD for the Dow has diverged lowers in recent months, the monthly and daily MACD indicators look okay.  That’s two out of three, so I’m not worried about it.  Plus, the weekly MACD recently gave a positive crossover signal. 

It’s also not uncommon for the MACD indicator to diverge lower against the price line of a stock or major index in an established bull market -- it essentially reflects an “internal correction.”