MACD
A Technical Buy Signal



The MACD Crossed Above Zero on Thursday Last Week – a Major Buy Signal!



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March 5, 2012

The moving average convergence/divergence (MACD) histogram for the S&P 500 Index (SPX) on a monthly chart officially moved above the zero line on Thursday, March 01, with very little trader notice!

Simply put, this indicator is computed by the difference of two exponential moving averages (EMAs) charted along with a moving average of the difference. The divergence between the two is shown as a histogram.

What is important to know is this technical indicator has a very nice longer-term record, and suggests the overall uptrend is still firmly in place for the bulls. As you can see on the chart below, when this indicator is above zero, we've seen some rather nice rallies going back the past decade.

MACD - 030512



Going back to 1974, there have only been eight buy signals -- the results seem quite conclusive!

030512-MACD-3



Here are all eight signals and their returns. Note that the markets were higher every time a year later.

030512-MACD-4



It appears that virtually no one is talking about the fact that this potentially very bullish signal has occurred. This is actually a very good sign -- compare this with when we had a MACD sell signal back in September -- it was all over TV and on blogs, as a sign of impending doom, and the bears once again taking control.

However, if you actually looked at the data, a sell signal really wasn't that bearish at all. Now, it was definitely not bullish, but the over-the-top bearish sentiment at that time was a great contrary indicator. This became a proven fact as soon after the market bottomed, and has had a huge rally off of the October lows.

030512-MACD-5



It is extremely important to incorporate the overall sentiment backdrop along with the technical’s to get a clear picture before exposing yourself to the market! When the bears were all technical experts on the MACD back in September, that seemed to be too extreme at the time -- a repeat of the series of Hindenburg Omens back in the summer of 2010. Although it did have a nice track record of bearish results, once everyone was talking about it and was worried about the coming drop in equities, that marked the ultimate lows for trading in 2010, and preceded a huge rally for the remainder of the year.

So if you are bullish now is the time to make the most of the market – rally-mode seems to be continuing – so make the most of the opportunity!


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