The MACD (Moving Average Convergence Divergence) Indicator is one of many tools in a market technician’s toolbox. The indicator takes two moving averages (usually the 12 period and the 26 period exponential moving averages) and converts them into a momentum oscillator by subtracting the longer period from the shorter period. There are a variety of ways to interpret the MACD indicator, but for right now we are focusing on signal crossovers. To do that we also create a 9 period exponential moving average of the MACD for use as a signal line.
At Pinnacle, we are concerned with longer market cycles and use monthly data for a lot of our analysis. In this case, the chart to the right shows the S&P 500 in the top section and the monthly MACD of the S&P 500 in the bottom panel (the MACD in black and the 9 month EMA of the MACD in red), going back to 1998. When the black line is above the red line the trend is bullish, and when the black line is below the red line it is bearish. The signal crossover from above to below or below to above can help identify market turns.
As a simple turn signal, the MACD has a good track record back to 1998. If the MACD is bullish (above the signal line) the investor buys the S&P 500, and when the MACD is bearish (below the signal line) the investor sells the S&P 500 to cash. The return of the S&P 500 price index is 62.3% while the MACD system has a return of 147.08%.
Reviewing this indicator seemed appropriate as the monthly MACD has just issued a sell signal as of January 30. This latest confirming evidence comes after other key momentum measures we track have been slowing for several quarters — this can be symptomatic of a market in the process of topping, and this portion of our work is a big reason that our overall assessment of technical conditions is showing a mildly bearish signal. At present, other non-technical parts of our process are currently holding the overall evidence to a neutral reading, but as we continue riding this aging bull market, we’ll be looking for other signs that the best may be behind us.