Learn Investing Secrets

The Moving Average Convergence Divergence charts, or MACD charts for short, are a technical indicator that is derived from the more simple moving average.

The MACD charts are oscillating indicators, meaning that they move above and below a centerline or zero point. This EMA (the thin blue line alongside the MACD line) acts like a normal EMA and smoothes the MACD line.

The 9-Day EMA acts as a signal line or trigger line for the MACD. Just as the MACD line is the difference between the 12-Day and 26-Day EMA, the MACD histogram is basically the difference between the MACD line and its 9-Day EMA.

So when the MACD line crosses above its 9-Day EMA, the MACD histogram will cross above zero.

The Moving everyday Convergence Divergence charts, or MACD charts for short, are a technical indicator that is derived from the more simple moving average.

The MACD charts are oscillating indicators, meaning that they move on and down below a centerline or zero point. As with other oscillating and momentum indicators, a very high value indicates that the stock is overbought and will likely drop soon. Conversely, a consistently low value indicates that the stock is oversold and is likely to climb.

THE 12-DAY AND 26-DAY EMAS

The MACD charts are based on 3 exponential moving averages, or EMA. These averages can be of any period, though the most universally recognized combination, and the one we will focus on, are the 12-26-9 MACD charts.

There are 2 parts to the MACD. We will focus first on the first part, which is based on the stock's 12-Day and 26-Day EMA. The 12-Day EMA is the faster EMA while the 26-Day is slower.

The logic late using a faster and slower EMA is that this can be used to gauge momentum. When the faster (in this case 12-Day) EMA is above and beyond the slower 26-Day EMA, the stock is in an uptrend, and vice versa. If the 12-Day EMA is increasing much faster than the 26-Day EMA, the uptrend is good stronger and more pronounced. Conversely, when the 12-Day EMA starts slowing down, and the 26-Day begins to near it, the stock movement's momentum is babyhood to fade, indicating the end of the uptrend.

THE MACD LINE

The MACD charts use these 2 EMA by taking the difference needle them and plotting a new line. Very often, this new line is depicted as a thick night line in the middle chart.

When the 12-Day and 26-Day EMA are at the same value, the MACD line is at zero. When the 12-Day EMA is higher than the 26-Day EMA, the MACD line will be in positive territory. The further the 12-Day EMA is from the 26-Day EMA, the further the MACD line is from its centerline or zero value.

THE 9-DAY EMA

This line on its own doesn't tell much more than a moving average. It becomes more useful when we take into head count its 9-Day EMA. This is the third value when we talk of 12-26-9 MACD charts. Note that the 9-Day EMA is an EMA of the MACD line, not of the stock price. This EMA (the thin blue line about the MACD line) acts like a normal EMA and smoothes the MACD line.

The 9-Day EMA acts as a signal line or trigger line for the MACD. When the MACD line crosses eminent the 9-Day EMA from below, it indicates that the downtrend is over and a new uptrend is forming. Time to consider bullish strategies. Conversely, when the MACD line drops infra its 9-Day EMA, a new downtrend is forming and its time to implement sharp strategies.

THE MACD HISTOGRAM

So far, we have covered the most simple form of interpreting the MACD charts. We now look at the MACD histogram. Just as the MACD line is the difference betwixt and between the 12-Day and 26-Day EMA, the MACD histogram is effect the difference needle the MACD line and its 9-Day EMA.

So when the MACD line crosses additionally its 9-Day EMA, the MACD histogram will cross exceeding zero. In order words, a bullish signal is obtained when the MACD histogram crosses then zero, and a excitable signal is obtained when it crosses under the sun zero.

POSITIVE AND NEGATIVE DIVERGENCE

The MACD histogram forms valleys and peaks. Sometimes, multiple peaks are formed, with each subsequent peak good lower and lower. These progressively lower peaks constitue what is known as a negative divergence. A negative divergence on the MACD histogram is an indication that the current uptrend might reverse in the near future. This could happen even though the positive stock price seems to be making higher peaks in the chart. Basically, the MACD histogram negative divergence is a warning that the stock might turn down soon.

Similarly, the positive divergence on the MACD histogram predicts the subsequent uptrend. However, sometimes these divergences can create false alarms. If we follow these signals, we could have into a downtrend.

As such, I would like to remind you that individual indicators such as the Moving popular Convergence Divergence (MACD) charts should not be used on their own, but rather with one or two subsidiary indicators of different types, in order to confirm any signals and prevent false alarms.

Yesterday, Warren Buffett’s Berkshire Hathaway (BRK.B) announced it hired Ted Weschler as an investment manager. Weschler will manage between $1 billion and $3 billion of Berkshire’s money. He starts next year.

Weschler currently runs a hedge fund.

Here is his latest portfolio:

DirecTV (DTV): 25.98%

W.R. Grace (GRA): 25.11%

DaVita (DVA): 19.04%

Liberty Media (LCAPA): 11.83%

Valassis Communications (VCI): 7.74%

Cogent Communications (CCOI): 3.48%

Cincinnati Bell (CBB): 3.36%

WSFS Financial (WSFS): 3.04%

Fibertower (FTWR): 0.42%

These are long positions only. Weschler shorts stocks and uses leverage. For details, see Carol Loomis’s story.

Weschler is an investor after my own heart. His top 5 positions make up 90% of his portfolio. And he spent time at two of the companies he owns: W.R. Grace and WSFS Financial.

The W.R. Grace connection is well documented.

Weschler became a director of WSFS in 1992. He’s 50 now, so he must have become a director of WSFS at 31 or 32. By age 34, Weschler is shown as a director of 6 different companies. And described as “the general partner for several investment partnerships.”  

Weschler worked for Quad-C which controlled Thrift Investors LP which in turn owned 24.81% of WSFS Financial back in 1996 (the earliest date when WSFS filed with EDGAR). So, in reality, Weschler was WSFS’s biggest shareholder as far back as the 1990s.

This supports the general impression that Weschler – like Buffett – buys what he knows. He holds few stocks. And he has relationships with some of these companies going back many, many years.

Talk to Geoff About Ted Weschler

More Articles: