The Moving Average Convergence Divergence charts, or MACD charts for short, are a technical indicator that is derived from more simple moving average. The MACD charts are oscillating indicators, meaning that they move above and below a centerline or zero point. As with other oscillating and momentum indicators, a very high value indicates that stock is overbought and will likely drop soon. Conversely, a consistently low value indicates that stock is oversold and is likely to climb.
THE 12-DAY AND 26-DAY EMAS
The MACD charts are based on 3 exponential moving averages, or EMA. These averages can be of any period, though most common combination, and one we will focus on, are 12-26-9 MACD charts.
There are 2 parts to MACD. We will focus first on first part, which is based on stock's 12-Day and 26-Day EMA. The 12-Day EMA is faster EMA while 26-Day is slower.
The logic behind using a faster and slower EMA is that this can be used to gauge momentum. When faster (in this case 12-Day) EMA is above slower 26-Day EMA, stock is in an uptrend, and vice versa. If 12-Day EMA is increasing much faster than 26-Day EMA, uptrend is becoming stronger and more pronounced. Conversely, when 12-Day EMA starts slowing down, and 26-Day begins to near it, stock movement's momentum is beginning to fade, indicating end of uptrend.
THE MACD LINE The MACD charts use these 2 EMA by taking difference between them and plotting a new line. Very often, this new line is depicted as a thick black line in middle chart.
When 12-Day and 26-Day EMA are at same value, MACD line is at zero. When 12-Day EMA is higher than 26-Day EMA, MACD line will be in positive territory. The further 12-Day EMA is from 26-Day EMA, further MACD line is from its centerline or zero value.
THE 9-DAY EMA
This line on its own doesn't tell much more than a moving average. It becomes more useful when we take into account its 9-Day EMA. This is third value when we talk of 12-26-9 MACD charts. Note that 9-Day EMA is an EMA of MACD line, not of stock price. This EMA (the thin blue line alongside MACD line) acts like a normal EMA and smoothes MACD line.