One of the most commonly used tools in active trading is known as the moving average convergence divergence (MACD) indicator. Although the name of this indicator seems intimidating, it is actually quite simple to use and it can often generate profitable trading ideas.

As you can see from the chart below, the indicator consists of two parts: the MACD line and the signal line. The MACD line is simply the difference between two exponential moving averages, typically the 12-day and 26-day averages. The reason that traders pay attention to varying lengths of moving averages is because they want to figure out how the short-term momentum is changing relative to the longer-term momentum. If the short-term average falls faster than the long-term average, the MACD moves downward. Traders use this to suggests that the selling pressure is increasing.

The signal line, shown as the dotted blue line on the chart, is also known as a trigger line and is created by taking a nine-period moving average of the MACD line. The signal line is plotted alongside the MACD line and is used to predict changes in a stock's direction.

The most common sell sign is triggered when the MACD line crosses below the signal line (illustrated by the middle arrow in the chart above). A MACD cross below the signal line tends to predict that the bears are gaining control of the direction and it generally leads to a short-term move lower. Let's take a look at some stocks that have recently triggered a bearish MACD crossover:

AK Steel Holding Corporation (NYSE:AKS) - Taking a look at the chart of AKS, traders will notice that the price of the shares have recently broken out of a prolonged period of consolidation. Unfortunately for the bulls, the shares have pulled back toward the support of the 200-day moving average and now looks like it could be poised to head lower. Recent selling pressure has caused the MACD line to cross below the trigger line. This bearish crossover will be used by the bulls to confirm the downward momentum and they will likely add to the selling pressure if the price slips below the nearby moving average (around $14). A stop-loss order above the nearby pivot high is strategic because it will protect active traders from a move higher; it will also put them in a good position if the broad market weakness continues.

Flextronics International Ltd.
(Nasdaq:FLEX) - FLEX is another company that has recently experienced a bearish MACD crossover. The stock has recently bounced off the resistance of the $8.50 level and a double top pattern has formed on the chart. Shares have also fallen below the support of the nearby 50-day moving average and appear to be ready to break below the bottom of the pattern, which could trigger stop losses and increase the downward pressure. You'll also notice that the stock broke below the 50-day moving average with high volume, which suggests that the pattern is stronger than some bulls are anticipating and that the short-term downtrend will likely remain dominant. (For more, see Analyzing Chart Patterns: Double Top)

Starbucks Corp. (Nasdaq:SBUX) - This stock has been on an incredible run over the past few months, but the recent MACD crossover is suggesting that the bears may be getting ready to step in. The stock is trading near its 52-week high and recent weakness is causing many bulls to question whether the uptrend will be able to continue.

SanDisk Inc. (Nasdaq:SNDK) - Taking a look at the daily chart of SanDisk, you'll notice that the recent upward momentum ran out of steam at its high of $53.60. This chart looks similar to that of FLEX because a double top pattern has formed. The bears appear to be trying to send the stock below the nearby support, which would trigger stop losses and increase the short-term selling pressure. The recent downward pressure has also coincided with a bearish MACD crossover so many bullish traders will want to keep an eye on this to see how the pattern develops.

In closing, it is important to note that the short-term nature of the MACD indicator can often lead to being whipsawed in and out of a position several times before being able to capture a strong price movement. This tool should be used in conjunction with other technical indicators to ensure a more accurate idea about a stock's direction. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Technical Indicators

    Why MACD Divergence Is an Unreliable Signal

    MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.
  4. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  5. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  6. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  7. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  8. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  9. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  10. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!