Stocks, Interest Rates And The MACD by Kent Perkers
The notion that markets are interlinked is gaining widespread acceptance. However, the technique of timing trades in one market based on the price direction of another market still requires further fine tuning. Here, the moving average convergence/divergence (MACD) is presented as a method with which to identify the trend of interest rates that will in turn signal the coming trend in stocks.
The importance of changes in interest rates and their impact on equity markets has long been
recognized by astute fundamental and technical analysts. The ability of bond price trends to act as a
leading indicator of equity market direction is extraordinary, as illustrated by Figure 1. Discovering when
a change in the trend of interest rates has occurred is the challenge, one that the moving average
convergence/divergence (MACD) can answer.
The MACD, which was developed by technician Gerald Appel, is an oscillator based on the difference
between two exponentially smoothed moving averages of the closing prices. First, calculate the 26-week
exponentially smoothed moving average (using a smoothing constant of 0.075) of the closing price.
Second, calculate the 12-week exponentially smoothed moving average (using a smoothing constant of
0.15) of the closing price. The difference between the two moving averages is known as the MACD line.
The method then smoothes the MACD line with a nine-week exponentially smoothed moving average
(using a smoothing constant of 0.2). This line is called the signal line.