A thankyou from a reader about my explanations of some of the intricacies of the MACD presented in my last piece (Houston, we have divergence). I’ll admit, I went slightly off the deep end trying to jam two years of research on this little indicator into around 800 words.
The result was not pretty, and luckily your editor Kris Sayce managed to slap me silly and point out that, ahem, perhaps if I toned it down a bit and used words and explanations that don’t require a degree in Technical Analysis he might actually be able to publish the darn thing without fear of lawsuits from the disgruntled readers whose brains have gone pop.
After sleeping for a few hours, I re-read the piece, and had to lie down again as I realised the truth of his words.
So I got back up off the floor, and attacked it again. This time with a little more tenderness. And with hope Kris won’t call my mum and get me sent back to my room with my crayons and charts, telling me not to come out again until I stop talking gibberish…
So, here goes…
Previously I’ve mentioned Divergence between Price and the MACD, and how it can be used on different timespans. This time I’ll look at the AUDUSD pair as a few things have happened to suggest we may have a ‘catcheable’ future drop.
First up I’m going to show you a Daily chart of the AUDUSD pair:
Divergence, in this case between price and the MACD histograms, is highlighted by the paired red lines. This is a pre-emptive signal and is not an indication that it’s time to go short.
The divergence is only on the histograms. What I look for now after the “first signal” is for divergence to occur on the MACD moving averages before getting ready to pounce for a serious (in this case downside) run.
The pair may continue to go up (have a look at the possible targets I mentioned in ‘Will the Aussie Dollar Plummet to Fifty Cents?‘) and if it does, I will be looking closely at these MACD moving averages to see if divergence between price and that sub indicator occurs during further rises.
But let’s forget about divergence for a bit and have a look at some more stuff on the MACD that could hint on further upside to come.
MACD Histogram clusters
I’ve zoomed in on the chart to highlight groups of histograms on the MACD.
The last set (cluster) of Negative MACD histograms on the right hand side of the chart has formed three troughs.
The formation of three peaks/troughs on histogram clusters often sees an opposite price and a quick observation of the histograms clusters in the above chart shows where this occurred.
A three trough negative cluster formed in January with a quick spurt up early February.
Three peaks in a positive cluster in March to mid April was followed by a quick spurt down.
Three peaks in a positive cluster from May to June, pre empted a quick spurt down…
You get the drift.
A break to the upside, and confirmation of the current three-trough negative cluster highlighted on the right of the chart could well pre-empt a nice tradeable opportunity.
Divergence Demonstration
And Finally, Another Grand Demonstration of How Divergence On Both MACD Histograms and MACD Moving Averages can predict some pearlers of moves:
On this Monthly chart I have done some very basic highlighting of divergence, that gave a good indication of upside initially on this time span, and then gave a good indication of the downside (note, these pre-emptive indicators took years to form).
If only I’d been more aware of this methodology when these moves occurred!
‘Til next time…
Joe Zolin
for Money Morning Australia
