The technician will use many tools, however, one that I have found very useful is the MACD. Sounds very complicated and it is to a degree, but it is very useful for signaling changes in momentum and trends. I’m going to explain what the MACD is and I wouldn’t be too concerned as to whether you understand it or not. This tool is available from all sites that provide you with charts on the stock market. You can choose to add it to any chart that you are following.

macd

MACD is short for moving average convergence divergence. The MACD formula is MACD 12, 26 and 9. The blue  line is the difference between the 26 day (yellow line) and the 12 day (green line) exponential moving averages. A 9 day (white line) exponential moving average of the MACD line is then superimposed upon the MACD as a signal line.

macd

When the MACD line (blue) is below the zero line (white hashed line) then the situation is considered to be bearish and above the zero line is bullish.

macd crossover

The crossover points as indicated by the arrows are far from exact but close enough to give you the opportunity to be on the right side of the trade. It appears as though a crossover point is close to occurring at this point (red arrow).

The important point is to look for these crossovers for they do give an indication of the future direction of the markets. We are very close to a crossover (red arrow) and this is in line with a need correction in the markets. I have suggested that the markets will test the half way point of the last rally and this seems to indicate that it is beginning. This is not an exact science but something to consider as a tool to uncover potential market actions.

 

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