MACD Formula

According to StockCharts, the most popular MACD formula, which is the one that we will use, is the difference between a security's 26-day and 12-day exponential moving averages. This is the formula that is used in many popular technical analysis programs and quoted in most technical analysis books on the subject. For our purposes, the traditional 12/26 MACD will be used for explanations.

Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line. A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish crossover occurs when MACD moves below its 9-day EMA. The EFA chart below shows the 12-day EMA (thin blue line) with the 26-day EMA (thin red line) overlaid the price plot. The EFA chart below shows the MACD in the box below as the thick black line and its 9-day EMA is the thin blue line. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

Based on the MACD formula, would you be a purchaser of EFA? Explain.

The URL for a full discussion on the MACD formula can be found at http://stockcharts.com/education/IndicatorAnalysis/indic_MACD1.html.