Catching Trend Reversals with the MACD Indicator

The MACD (Moving Average Convergence Divergence) is one of the most popular indicators used in technical analysis to track both momentum and trend direction. Developed by Gerald Appel, this indicator is based on the relationship between two different moving averages. Analysis is usually performed with the MACD line, obtained from the difference between the 12-day and 26-day exponential moving averages (EMA), and the Signal line, consisting of the 9-day EMA of the MACD line. A histogram (bar chart) showing the difference between these two lines is also displayed on the chart.

The most basic method used when interpreting the MACD indicator is the crossovers of the MACD line and the Signal line. When the MACD line crosses the Signal line from below upward, this is considered a 'Buy' signal. This crossover indicates that upward momentum is increasing. When the MACD line crosses the Signal line from above downward, this is a 'Sell' signal and points to a potential start of a downtrend. How far from the zero line the crossovers occur also affects the strength of the signal. Upward crossovers occurring far below the zero line usually generate stronger reactions.

The MACD histogram is also a great tool to analyze trend strength. If the bars on the histogram rise above the zero line, it is understood that the uptrend is strengthening; if they extend below the zero line, the downtrend is deepening. A shortening of the bars indicates that the current trend is losing momentum and a reversal may be near. For example, the shortening of red bars below zero is an early signal indicating that the strength of sellers is exhausted and buyers are about to take control.

Like the RSI, the MACD indicator can form divergences with price. When price makes a new bottom while the MACD makes a higher bottom, this is positive divergence and a harbinger of a strong rise. When price makes a new high while the MACD makes a lower high, this is negative divergence and shows that a decline is near. Since MACD is a trend-following indicator, it works with a very high success rate, especially in markets with strong trends. However, caution should be exercised as it can produce false signals very frequently in horizontal (trendless) markets.

In our Sermaye Borsasi Telegram data terminal, we scan the MACD status and crossovers of BIST 100 stocks instantly and share potential trend beginnings with our members. Relying on a single indicator in technical analysis is risky; therefore, we recommend supporting MACD signals with moving averages and volume data. Learning MACD analysis is a critical step to read the market professionally and not miss big trends. As Sermaye Borsasi, we support data-driven analysis.