The best technical indicators to use with moving average convergence divergence (MACD) indicators are support and resistance areas and candlestick chart patterns that indicate potential market reversals. The MACD is commonly used by traders and analysts as a momentum indicator. It is composed of two exponential moving averages (EMAs) – a short-term EMA of 12 and a longer-term EMA of 26 – and represents as a histogram the difference between the two averages. The MACD overlays the histogram with a nine-day EMA line.
Traders use the MACD as a divergence indicator to provide an early indication of a trend reversal. When the price makes a new high or low, but the MACD histogram fails to reach a new high or low, the divergence is interpreted as an indication the current trend's momentum is beginning to wane and the market may soon change direction.
Support and resistance areas and candlestick patterns are two other technical indicators helpful in identifying a point where a market may reverse course, and these commonly occur at market turning points. For example, if the MACD gives a divergence from price indication at an area identified as a major support or resistance level in a market, that situational fact lends further likelihood to the MACD's indication that price may soon change direction. (For related reading, see "Support and Resistance Basics.")
Candlestick patterns, such as a doji, hanging man, or bullish or bearish engulfing candle, are also interpreted as signals of market reversal. A trader recognizing one of these candlestick patterns at the same time that the MACD shows a divergence from the market's price movement has some corroboration of indicators showing the market may be turning and changing trend. The MACD can also be complemented by other technical indicators designed to signal market reversals.
(For related reading, see "MACD Histogram Helps Determine Trend Changes.")