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The 9-Day EMA acts as a signal line or trigger line for MACD. When MACD line crosses above 9-Day EMA from below, it indicates that downtrend is over and a new uptrend is forming. Time to consider bullish strategies. Conversely, when MACD line drops below its 9-Day EMA, a new downtrend is forming and its time to implement bearish strategies.
THE MACD HISTOGRAM So far, we have covered most simple form of interpreting MACD charts. We now look at MACD histogram. Just as MACD line is difference between 12-Day and 26-Day EMA, MACD histogram is basically difference between MACD line and its 9-Day EMA.
So when MACD line crosses above its 9-Day EMA, MACD histogram will cross above zero. In order words, a bullish signal is obtained when MACD histogram crosses above zero, and a bearish signal is obtained when it crosses below zero.
POSITIVE AND NEGATIVE DIVERGENCE
The MACD histogram forms valleys and peaks. Sometimes, multiple peaks are formed, with each subsequent peak becoming lower and lower. These progressively lower peaks constitue what is known as a negative divergence. A negative divergence on MACD histogram is an indication that current uptrend might reverse in near future. This could happen even though actual stock price seems to be making higher peaks in chart. Basically, MACD histogram negative divergence is a warning that stock might turn down soon.
Similarly, positive divergence on MACD histogram predicts subsequent uptrend. However, sometimes these divergences can create false alarms. If we follow these signals, we could have bought into a downtrend.
As such, I would like to remind you that individual indicators such as Moving Average Convergence Divergence (MACD) charts should not be used on their own, but rather with one or two additional indicators of different types, in order to confirm any signals and prevent false alarms.
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