MACD Applied: The Bullish Divergence
As in our previous article, we'll use the S&P 500 (SPX) index to illustrate. The figure below shows a traditional daily high-low-close price chart (top pane) and MACD (lower pane) for the most recent two years:
NOTE: The charts in this article were produced from MarketBrowser.
Notice the three vertical lines on the chart labeled "1", "2", and "3". "1" on October 10, 2008, marks the first low in the SPX in the decline that started in October, 2007; note that the MACD is also at its first low, -76.994, in the 2 year period shown on the chart. "2", on November 21, 2008, marks a new low in the SPX at 741.02, but MACD, which started to rise shortly after the low marked by "1", is now at -53.057. By the time that SPX made the new low at 666.79 on March 3, 2008, MACD continued to rise so that it was at -40.512.
We have three successive lows in the SPX but successively higher lows in MACD. This is a "bullish divergence" where the index is in a declining trend while MACD is in a rising trend. This portends an eventual end to the SPX downtrend and a subsequent rise in SPX. In fact, this marks the bear market low (so far!) from which SPX has risen ~50%!