Bearish MACD Crossovers With A Positive Twist

By Cory Mitchell | September 05, 2012 AAA

The moving average convergence divergence (MACD) indicator is very popular and most notable known for bullish and bearish crossovers. A bearish crossover shows that sellers or short-sellers are gaining control and a drop or continued weakness is likely in a stock's price. The MACD is composed of two moving averages, a fast line and a slower MACD line. When the fast line crosses below the MACD line from above it, it is a bearish crossover. The MACD crossover is prone to providing false signals, therefore, other technical factors and elements of the MACD - such as divergence - should be looked at in conjunction with the crossover. With certain stocks below, that additional information reveals that the weakness may just be a buying opportunity longer term.

SEE: Trading The MACD Divergence

Infosys Ltd. (Nasdaq:INFY) is based in India and provides consulting and outsourcing services around the globe. On September 4, the fast line crossed below the MACD line indicating further short-term weakness could develop. The stock has been on an overall downtrend since February, and with little support until $40, followed by the 52-week low at $37.93, the crossover could keep that downtrend in motion. The MACD can also be used a different way though - to show divergence. Divergence is when the indicator is trending in one direction while the price moves in another. The MACD has been trending higher while the price has been moving lower. Therefore, the crossover implies short-term weakness, but longer term the positive divergence of the indicator points to the stock price getting stronger. If the positive divergence remains, short-term selling -good for short-selling traders - could result in a buying opportunity for long-term investors. If the MACD breaks the upward trendline though, it is a bearish signal both for the short and long term.

General Dynamic Corp. (NYSE:GD) is an aerospace and defense company that has a similar chart to Infosys in a couple ways. Primarily, the stock has been in a downtrend since April, but since June has leveled off it's predominately moving sideways. The downtrend lends credibility to the bearish MACD crossover which occurred on September 4. The low of the price range the stock has been trading in provides support between $62 and $61 - an area likely to be tested based on the bearish crossover. A drop below that level indicates a continuation of the downtrend and a more severe price drop. Since June, the MACD has been rising while the price has flat-lined - a positive divergence. Short-term weakness may be a buying opportunity for longer-term investors if price support holds and the MACD continues to trend higher overall. The price rising above $67 would confirm the longer-term positive outlook. If the MACD trendline or price support is broken though, it does not fare well for the price, short term or long term.

SEE: A Primer On The MACD

Aetna Inc. (NYSE:AET) is a healthcare, group insurance and pension provider and has been in a steady downtrend since April. The recent bearish MACD crossover presents an opportunity to get short for the potential next wave down. Minor support is at $36, followed by $34.50 to $33.42 (52-week low). Since May, though, the stock has been showing a positive divergence - a bullish signal for the stock over the long term. Short term the crossover is likely to take the price towards support, but if the overall uptrend in the indicator remains intact that pullback could be a great buying opportunity as the divergence indicates the price could reverse and trend higher. Any long-term strength that does develop will ultimately need to push the price above $41, as there is resistance just below.

L-3 Communications Holdings (NYSE:LLL) provides intelligence, communication and surveillance systems as well as aircraft upgrades and government services. The stock has been quite choppy throughout the year. Going back to early 2008 the stock price has been in a long-term decline. The bearish MACD crossover points to a potential short-term weakness and a test of support at $68, and if that is surpassed, then it's at $66. Further support is at $64. Unlike the former three stocks, L-3 Communications is not showing a positive divergence. Instead, like the stock price, the MACD is range bound. Short-term trades can trade these bounces back and forth between support and resistance, as long as the MACD also stays with its current range - between 1 and -1. Investors who like the stock's prospects or its dividend may opt to buy it near the low of the price range, or as the MACD approaches -1. Doing so is an attempt to pick the stock at a discount and take advantage of the price and MACD range, although it should also be considered that the long-term trend remains down.

SEE: MACD Histogram Helps Determine Trend Changes

The Bottom Line
The MACD provides a lot of information and the crossover can be used as trade signals. The crossover in these stocks point to short-term weakness, suitable for short-term traders looking for a short trade. Long term though, other elements of the MACD can be used to confirm the signal. Three of these stocks are showing a positive MACD divergence, which means the short-term weakness may be a long-term buying opportunity if the price follows the MACD higher. The fourth stock is ranging, and the MACD is useful in that regard as well. Crossovers and the range the MACD is in can be used in conjunction with the price range to pick entries and exits. As always, control risk and remember that price is the ultimate indicator.

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.

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