The Moving Average Convergence Divergence (MACD) indicator is used by many traders for its trend- and momentum-following capabilities. The indicator provides several types of signals, including signal line crossovers, zero-line crossovers and divergences. When the MACD line, which moves faster, crosses the Signal line that moves slower, it's called a crossover. Four stocks are showing a crossover right now, but it's also important to look at the other MACD signals and the overall price trajectory before trading the bullish crossover signal.
SEE: Trading The MACD Divergence
CurrencyShares British Pound Sterling Trust (NYSE:FXB) has been in an overall downtrend since the start of the year, but there are some technical tea leaves that indicate at least a short term rally is underway and likely to continue through June and possible July. The recent low at $148.34 in May was higher than the previous swing low at $146.85 in March, which means the short-term trend is up even if the longer trend is still down. The MACD also just crossed the signal line from below, indicating a potential buy signal. One cautionary note though is that the MACD is currently below zero; when the indicator is in negative territory the trend is typically down. For a short-term swing trade of a couple weeks to a month, I like the signal. While the overall trend is still down, the short-term uptrend likely still has room to run into the $155 to $155.50 region.
SEE: The Anatomy Of Trading Breakouts
After falling during almost all of 2012, Deckers Outdoor (Nasdaq:DECK) has been making a turnaround in 2013. While it's still way off peak 2011 or 2012 levels ($118.90 and $92.27 respectively) the stock has climbed from a 2013 low of $35.70 to a June 4 close of $54.44, a 52% gain. The MACD is currently just below the zero line, which makes sense since the stock has pulled back and is consolidating below the April high at $60.25. A recent bullish MACD crossover indicates the MACD and price are likely to begin trekking higher once again. Based on the upward trend channel the stock has been in since late 2012, I'd expect the stock to reach $66 to $68 by the end of summer if the trend channel holds.
Fusion-io (NYSE:FIO) is more of a wildcard. The stock is capable of staging some aggressive upward surges, but the trend is decidedly down across all periods. The bullish MACD crossover indicates some sort of upswing is in the offing, but how far that rally goes is very questionable. Given the overall downtrend I'd expect to see any bullish momentum tucker out by $16.50, or if that's surpassed, $18. One thing to keep an eye on though is the bullish divergence on the MACD. While the stock price has been falling since October 2012, the MACD has been making higher lows. This is a positive longer-term signal for the stock, but until the price actually starts heading higher too it is too early to buy based on the divergence.
SEE: How To Trade The Head And Shoulders Pattern
ArthroCare (Nasdaq:ARTC) witnessed a strong uptrend in 2012 but has been flat and slightly to the downside in 2013. Given the choppy trading in 2013 there have already been a few crossovers that resulted in very little upside movement. The MACD is also moving back and forth around the zero line, showing indecision and a lack of trend. That doesn't mean the bullish crossover should be ignored though, it just needs a price catalyst as well. The price has been channeling in a downward sloping trend channel, so a breakout above that channel - $35 - would confirm the MACD crossover signal and present a buying opportunity. As long as the stock stays within that channel though, profitable opportunities are likely to be minimal.
The Bottom Line
The MACD is useful for finding trades based on momentum and trends. Traders typically look for trades based on crossovers, zero-line crossovers and divergence. It's also advisable to wait for price to confirm the signal; if a bullish MACD signals occurs, wait for the price to also start moving up before trusting the signal. The indicator doesn't provide stop levels or profit targets though, therefore, risk should still be controlled with a stop loss order that will prevent losses from getting out of hand.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.