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After the Dow failed to hit the 20,000 mark yesterday, the TV news pundits went crazy.
In a matter of minutes, one station was calling for a huge stock market correction, while another not only dismissed it – but said a correction was impossible next year.
Clearly, these talking heads don't actually know if – or when – the markets will turn.
But there are two very distinct "lines" that do know…
These lines will tell you how strong this market rally is, how much longer it can hold up, and exactly when to get in and out of your trades…
…before the rest of the crowd.
How the MACD Will Tell You When a Trend Is Reversing
The "Moving Average Convergence Divergence," or MACD (pronounced Mac-D), is a popular momentum indicator that traders use to measure strength and duration of a trend.
Many refer to it as the trend-following momentum indicator, but it can also be used to signal a possible end to a trend and a reversal in the underlying price. Those signals are where you can use this indicator to your advantage to get in and out of your trades ahead of the trend.
But before I show you, let me give you a brief explanation of how the MACD is formed and how it can show the strength or lack of strength of a trend.
The MACD has two lines plotted on the chart. The first line is the "MACD line." It's formed by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA.
The second line is called the "Signal line." That line is the nine-period EMA of that MACD line. Basically, the signal line is the moving average of the difference of the two moving averages plotted in the MACD line.
The 12-, 26-, and nine-period numbers are the typical default of software programs when plotting the MACD. It can be shortened or lengthened to your liking, but this is the standard across the board.
Take a look below…
Crossing over the "Zero Line"
When the 12-period EMA crosses above or below the 26-period E…
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.