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Investment Analysis Clubs / Kua`aina Partners


Subject:  Re: Questions for NukeJohn Date:  12/28/2001  11:30 AM
Author:  nukejohn Number:  12719 of 26611


An excellent question, and something I should have covered previously.

The MACD on Yahoo:

MACD (Moving Avg Convergence/Divergence):
MACD ("Moving Average Convergence/Divergence") is a trend-following momentum indicator that shows the relationship between two moving averages of prices. MACD is represented as the difference between a 26-day and 12-day EMA (exponential moving average). A 9-day EMA, referred to as the "signal" (or "trigger") line, is plotted on top of the MACD to indicate buy/sell opportunities.
According to Stephen Aechlis, the MACD is most effective in wide-swinging trading markets. He also indicates the three standard ways to interprete the MACD (as quoted from his book Technical Analysis from A to Z):

The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It's also popular to buy/sell when the MACD goes above/below zero.

Overbought/Oversold Conditions
The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it's likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions exist vary from security to security.

A indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

The Average Volume on the chart at Yahoo is:

Avg Vol
Average Daily Volume is the monthly average of the cumulative trading volume during the last 3 months divided by 22 days. It is updated weekly and is provided by Market Guide.

The RSI on Yahoo:

RSI (Relative Strength Index):
The Relative Strength Index measures the price of a security against its past performance in order to determine its internal strength (in an attempt to quantify the security's price momentum).

According to Stephen Achelis:
"A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal."


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