Individual stocks and MACD
by Thomas Aspray
The Moving Average Convergence-Divergence method „ specifically MACD-Histogram (MACD-H)
and MACD-Momentum (MACD-Mo) „ can be used to identify turning points in the commodity
markets (See Stocks & Commodities, August and September 1988). MACD also is useful and valid for
the cash indices as well as individual stocks. In this article, I will show you how these indicators work on
Calculating MACD is a straightforward matter (Figure 1). The real work is in choosing the moving
average period length. I calculate MACD-H using 10-, 20- and 10-periods (day or week). The MACD-H
is the histogram version of the oscillator implemented in the CompuTrac system. My new MACD-Mo is
a 3-period smoothed (simple moving average) of a 10-period momentum of the MACD-H.
Gerald Appel, who developed MACD, originally used periods (days) of 12 and 26 days to calculate
MACD and a 9-day average to get a "signal" line. These periods may be translated into approximate
exponential moving average (EMA) alpha's by a = 2/(n + 1), where "n" is the number of days. Using
these values to be consistent with Appel's work,12 days = 0.15, 26 days = 0.074, and 9 days = 0.2. Thus, ...
Figure 2 - NYSE Composite
In this weekly chart, the first point to concentrate on is May 1987, where both MACD-H and the
MACD-Mo were negative. The MACD-Mo flattened out in late May and started rising by late June. The
MACD-H bottomed in the latter part of May and then began to rise. With both lines improving in
mid-June, the retest of the lows provided a buying opportunity.
The MACD-H moved into the buy mode in the first week of July, point 1, and was confirmed one week
later when MACD-Mo crossed above the zero line, point 2.