MACD consists of three components. First, there is MACD itself, which is the 12-day EMA less the 26-day EMA. Second, there is the signal line, which is a 9-day EMA of MACD. Third, there is the MACD Histogram, which plots the difference between MACD and its signal line. Let’s look at these individually.
As the difference between two moving averages, MACD is a momentum oscillator that has some trend following lineage. After all, moving averages are trend following indicators. MACD is positive when the shorter (faster) moving average is above the longer (slower) moving average. MACD is negative when the 12-day EMA is below the 26-day EMA. On the MEMC Electronics (WFR) chart below, notice that MACD crossed the zero line six times in six months.
The MACD signal line helps identify turns in MACD. MACD is moving up when it crosses above its signal line, and moving down when it crosses below its signal line. The MACD Histogram anticipates signal line crossovers by plotting the difference between MACD and its signal line. MACD Histogram narrows as the gap between the 12-day and 26-day EMAs narrows. Also notice that the histogram turns up or down ahead of MACD. Overall, the histogram is negative when MACD is below its signal line and positive when MACD is above its signal line.
The basic MACD indicator in SharpCharts plots MACD, its signal line and its histogram. Sharpcharts also has a stand-alone indicator for the MACD Histogram, which is shown in the chart below. The blue dotted lines show zero line crossovers, or when MACD crossed its signal line. There were nine such crossovers in the last six months.
