Stocks appear to have moved past the market meltdown from several weeks ago, and are currently trading near all-time highs. While some of that exuberance stems from expectations for rates to head lower, along with economic data that mostly appears to be headed in a positive direction, many of the factors that triggered the brief stock selloff in early August remain.
What do the charts say? Investors that use indicators to help figure out which direction stocks may go over the short term can find that MACD might suggest there's more room to rally.
What MACD says now
The Moving Average Convergence-Divergence indicator, commonly known as MACD, is a technical indicator consisting of 2 lines—the MACD line and the signal line—as well as a bar chart.1 It is used to generate buy-and-sell signals with readings that suggest something is overbought (i.e., potentially expensive) or oversold (i.e., potentially cheap). MACD is a momentum oscillator that is generally best employed in trending markets—where prices are trending in a particular direction. See the bottom section of the chart below for a sense of what MACD looks like. The top section shows the S&P 500, which demonstrates that US stocks have trended higher in 2024 (with several downturns mixed in) and how the rally has accelerated to new all-time highs in recent weeks.
Short-term buy-and-sell signals are generated by the MACD line and the signal line. If the MACD line crosses above the signal line, this may be interpreted as a buy signal. Alternatively, if the MACD line crosses below the signal line, this may be interpreted as a sell signal. In mid-August, the MACD line crossed above the signal line, generating a buy signal. The next signal to look for would be a sell sign, but MACD is not currently nearing such a signal.
These 2 lines fluctuate around the zero line. A sell signal is given when the signal line or the MACD line crosses below the zero line, and a buy signal is given when either cross above the zero line. The MACD line crossed above the zero line in mid-August, generating a buy signal. The zero line is also significant because it can act as support and resistance.
Some chart users think oscillators like MACD are most valuable when they reach their boundary's extreme levels (i.e., the MACD and signal lines are relatively far away from the zero line). The signals using this interpretation would be as follows: When the MACD line is well below the zero line in extremely negative territory, it can suggest an investment may be oversold (i.e., a buy signal). Alternatively, when MACD is well above the zero line in extremely positive territory, it can suggest an investment may be overbought (i.e., a sell signal). Currently, neither line is near what might generally be considered an extreme level. It's worth noting that MACD can theoretically rise or fall indefinitely.
The difference line, represented in the chart by the blue bars, is typically presented as a bar chart around the zero line. This bar chart represents the difference between the MACD line and the signal line. It helps depict when a crossover may take place. Recall that a crossover generates buy-and-sell signals. A narrowing of the difference line (i.e., when the bars decrease) illustrates the potential for a crossover. The difference line has widened in recent weeks, suggesting a crossover is not imminent.
Confirming the trend
One technique that technical analysts may use to confirm the direction of the trend is to determine whether the MACD indicator is making higher highs or lower lows in conjunction with the price. Some traders that utilize this strategy wait for a "trigger," or some sort of confirmation of the divergence. Both the S&P 500 and MACD have been making higher highs in recent weeks, which suggests that the uptrend may continue.
In sum, the various signals generated by MACD appear to have been bullish over the past several weeks, suggesting the short-term trend could continue to be up. Of course, fundamental factors could quickly change this outlook. Keep an eye on the latest market developments, both in the charts and in other data, to stay ahead of the trend.
