Bullish And Bearish MACD Crossovers

By Cory Mitchell | September 02, 2014 AAA

The MACD indicator is used for both trend following and gauging momentum. While there are multiple ways to use the MACD, one way to watch for the fast line to cross above the slow line, indicating a shift in momentum. The following four stocks have witnessed a crossover, indicating a short-term continuation in the current direction. Indicators typically need a context though, and by combining the MACD trade signal with price analysis we get a more well-rounded outlook of what these signals mean for these stocks.

LinkedIn (NYSE:LNKD) witnessed a bullish MACD crossover on February 25. This is the fourth bullish crossover since November, and each time it has occurred the price has made it's way to the top of its current trend channel. Currently the channel intersects near $220, providing a reasonable target based on current conditions. Overall the trend is down though, confirmed by a downward sloping trend channel and lower price highs and lower price lows, as well as the MACD being well below the zero line. If the price were to move above the recent high at $225, there is a potential case for more bullishness, but as it stands the bullish crossover likely only means a rally to the top of the channel. At the top of the channel traders can then look for bearish crossovers assuming the downtrend will continue.

Wyndham WorldWide (NYSE:WYN) experienced a deep correction after hitting a high of $75.25 in late January. The depth of the correction created lower lows and lower highs bringing the MACD into negative territory. Through the latter part of February though the stock has stabilized and started to edge higher. This has resulted in a bullish MACD crossover. For those thinking the longer term uptrend will continue this crossover provides an entry, with a stop placed near $68 and a target above $75. If the price rallies from here, but is unable to reach the former high, traders will be watching for a bearish MACD crossover in anticipation of this short-term downtrend continuing.

American Tower (NYSE:AMT) recently created a double top when if failed to clear $85 on February 21 and then saw a dramatic decline in the two days following. The sharp sell-off created a MACD bearish crossover. The prior bearish crossover (January 24) resulted in a sell signal that occurred right near the bottom of the move before a bounce. This shows the MACD signals are not always profitable. Therefore, traders may also want to watch $78.38, that is the low between the two tops. If that price is broken it completes the double top and creates the expectation that the price will continue lower. With two attempts to break a strong resistance area, and very strong selling reactions this bearish crossover looks more promising than the last, yet caution is warranted as the price is currently inside a pattern and volatility is temporarily high.

Time Warner Cable (NYSE:TWC) is in an overall uptrend, but after a short-term selloff from the February 14 $147.28 high, it's seen a bearish MACD crossover. The price hasn't created any lower lows or lower swing highs, and the MACD remains above the zero line, therefore this isn't necessarily a sell signal. While the price may proceed a bit lower, filling more of the February 13 price gap, the price is likely to find support near $135. Therefore, the bearish crossover in this case indicates that a pullback is underway in an uptrend and buyers may be looking to pick up longs in the vicinity of the trendline. If the price drops below $130 there is a case of more bearishness, but until that occurs bulls may want to actually watch for a bullish crossover instead of focusing on this bearish one.

The Bottom Line

While a MACD can be traded on its own, using price action to provide a context for trades is often prudent. Just because a stock flashes a bullish crossover doesn't mean it is a good buy--for example if the trend is down. Instead, it may be better to wait for a bearish crossover and trade in the direction of the down trend. No matter what method is used, losing trades will occur. Therefore, establish risk and position size parameters before the trade based on your personal risk tolerance.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

 
comments powered by Disqus
Related Analysis
  1. In Telecom, Wireless Still the Key - Industry Outlook
    Stock Analysis

    In Telecom, Wireless Still the Key - Industry Outlook

  2. 3 Social Media Stocks See Big Swings In Short Interest
    Stock Analysis

    3 Social Media Stocks See Big Swings In Short Interest

  3. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  4. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

  5. Commodities: Has Their Time Come Again?
    Stock Analysis

    Commodities: Has Their Time Come Again?

Trading Center