Thread: Moving Average Convergence Divergence

Moving Averages

Moving averages provide an objective measure of trend direction by smoothing the price data. Normally calculated using closing prices.

Time Frames: Shorter length moving averages (MA's for short) are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but only pick up the big trends.

It is best to use a moving average that is half the length of the cycle that you are tracking.
If the peak-to-peak cycle length is roughly 30 days then a 15 day MA is appropriate.
If 20 days, then a 10 day MA is appropriate. You will, however, often find traders using 14 and 9 day MA's for the above cycles in the hope that they will generate signals slightly ahead of the market.

200 Day (40 Week) moving averages are popular for tracking longer cycles.
50 Day to establish a trend
30 Day for peaking economy
20 Day
10 Day
20 to 65 Day ( 4 to 13 Week) moving averages are useful for intermediate cycles; and
5 to 20 Days for short cycles.

Cycles vary in length over time - always check that the moving average you are using is still appropriate.

MACD chart school.

C fund chart.

Negative Divergence

A negative divergence forms when the security advances or moves sideways and MACD declines. The negative divergence in MACD can take the form of either a lower high or a straight decline. Negative divergences are probably the least common of the three signals, but are usually the most reliable and can warn of an impending peak.

The FDX chart shows a negative divergence when MACD formed a lower high in May and the stock formed a higher high at the same time. This was a rather blatant negative divergence and signaled that momentum was slowing. A few days later, the stock broke the uptrend line and MACD formed a lower low.
There are two possible means of confirming a negative divergence. First, the indicator can form a lower low. This is traditional peak-and-trough analysis applied to an indicator. With the lower high and subsequent lower low, the up trend for MACD has changed from bullish to bearish. Second, a bearish moving average crossover, which is explained below, can act to confirm a negative divergence. As long as MACD is trading above its 9-day EMA or trigger line, it has not turned down and the lower high is difficult to confirm. When MACD breaks below its 9-day EMA, it signals that the short-term trend for the indicator is weakening, and a possible interim peak has formed.

Divergence A situation that occurs when two lines on a chart move in opposite directions vertically. People often look for divergences by comparing a stock's direction to the direction of its RSI, its MACD or its Stochastic Oscillator. There are two kinds of divergences: positive and negative. A positive divergenceoccurs when the indicator moves higher while the stock is declining. A negative divergenceoccurs when the indicator moves lower while the stock is rising.