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MACD is a lagging indicator and is made using two exponential moving averages
As the domestic equity indices extended their gains for the second straight session on Thursday, the momentum indicator moving average convergence divergence, or MACD, signalling bullish crossover on 25 counters on the NSE.
Among the stocks that saw bullish crossover included Aarti Drugs, Adani Power, Coforge, Mindtree, Thyrocare Technologies, Chambal Fertilisers, NIIT, Adani Green Energy, Torrent Pharma, KNR Construction, Zuari Agro, Satin Creditcare and Shankara Building, among others.
What is MACD?
It is a momentum oscillator which is developed by Gerald Appel. By far, it remains the most simple and effective momentum indicators available. MACD is a lagging indicator and is made using two exponential moving averages.
Going with textbooks, it is the difference between the 12-day and 26-day exponential moving averages (EMA). A nine-day exponential moving average, called the ‘signal’ line, is plotted on top of the MACD to reflect ‘buy’ or ‘sell’ opportunities.
Calculation:
MACD Line = (12-Day EMA minus 26-Day EMA)
Signal Line = (9-Day EMA of MACD Line)
Signal Line crossovers are the most basic interpretation of MACD indicators.
How to interpret?
When MACD crosses above the signal line, it gives a bullish signal on the charts, indicating that the price of the security may experience an upward movement. On the other hand, a bearish crossover occurs when the MACD crosses below the signal line. At present, stocks like Phillips Carbon, RPG Life Sciences, APL Apollo Tubes, Pokarna, Apollo Pipes, Butterfly Gandhimathi Appliance are among 27 stocks that are trading below the signal line.
Expert take
Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services said, “MACD is an unbounded indicator and therefore it is not particularly useful in identifying overbought and oversold areas. It being a lagging indicator, it follows the price.”
Therefore, it is advisable that market participants should make use of other technical indicators like Relative Strength Index (RSI), Bollinger Bands, Fibonacci Series, candlestick patterns and stochastic to confirm any trend. Traders or investors can also consult their financial advisors before buying or selling a stock based on such technical indicators.