What’s the Moving Average Convergence Divergence?

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What’s the Moving Average Convergence Divergence?

The Moving Average Convergence Divergence (or MACD) was developed by Gerald Appel in the 1970s. The MACD is the difference between two moving averages.

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Calculating MACD

The MACD consists of two lines—the fast line and the slow line.

The fast line, or MACD line, is the (12-day exponential moving average) – (26-day exponential moving average).

It’s important to note that an exponentially weighted average of a moving average is called an exponential moving average.

The slow line is a nine-day exponential moving average. The slow line is also called the signal line.

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The above chart shows the MACD indicator for General Motors’ (GM) stock.

MACD lines are plotted between the ranges of -1, zero, and one. The center line between -1 and one is called the zero line. When the MACD line crosses over the signal line and rises above the zero line, this indicates that the trend could change. When the signal line crosses over the MACD line and falls below the zero line, this indicates that the trend could change. When the MACD line crosses over a signal line, it’s an entry signal. When the signal line crosses over the MACD line, it’s an exit signal.

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When the stock price is making higher highs in an uptrend and the MACD line is making lower highs, it’s called bearish divergence. This suggests that the trend could change. When the stock is in a downtrend and making lower highs and the MACD line is making higher highs, it’s called bullish divergence. This means that the trend could change.

Applying MACD concepts

In technical analysis, MACD concepts can be applied to stocks like Murphy Oil (MUR), Whiting Petroleum (WLL), Continental Resources (CLR), and Pioneer Resources (PXD). All of these companies are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

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