Macd The Happiness Gauge

Would you believe that the sharemarket has different moods

?

Sometimes it feels good and that means the market is moving up. Sometimes it feels terrible and down in the dumps and then guess what happens? The market tends to fall.

For traders and investors, when you take notice of the market mood, you can gauge the feeling that is likely to dominate the market before it impacts too heavily on share prices.

Theres an easy way to gauge the feeling of the market its called the Moving Average Convergence Divergence (or the MACD for short). Or you could call it the happiness gauge.

MACD

The MACD is used to determine when the mood of the market changes and helps you identify a change in trend.

When the sharemarkets mood is turning from good to bad, its usually time to sell. You can see this in the chart above. When the red line moves below the blue line in the bottom half of the MACD graph, this is usually a sell signal (Ive placed a big frown on the graph to plot where that has happened). It represents that the faster moving average has started to move lower and has crossed the slower line. The mood of the market is changing to a negative mood, so beware!

Conversely, when the red line moves above the blue line in the bottom half of the MACD graph, then the market mood is turning from sad to happy (this time Ive placed a big smile at this point). It represents the fast line moving higher and it has crossed the slower line, usually indicating a buy signal.

You can see that we saw a negative mood changing signal around 14 January which would have been a potential signal to sell. You can also see that a positive mood change signal happened around 15 February which would have been a potential signal to buy.

MACD lagging indicator

While this is a useful tool to have, there is one main drawback. The MACD is a lagging indicator, which means that it gives a signal to sell after the market has already started to move. It tends to lag price action.

On the flip side, MACD tends to be more accurate compared with a leading indicator.

Unfortunately the market doesnt consist of just good or bad moods. Sometimes its difficult to get a sense of what mood the market is in. So if youre seeing confusing signs, ignore that indicator and find another tool in your trading box to try and analyse the market.

Happy (or sad!) trading.

Julia Lee

Equities Analyst

Bell Direct

by: Julia Lee

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