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Moving Average Convergence Divergence Indiator MACDI
Dale uses the MACDI indicator extensively in his analysis
The MACDI is a two-component indicator based on two exponential moving price averages. Because of the early signals which can be derived from this indicator, it is regarded by many analysts as helpful in the trading of stock options.
The first component of the MACDI is a line which represents the difference between two moving averages, each computed for a different period of time. This first component is called the Price Phase Line. The second component, which is called the Signal Line, is an exponential average of the first component.
The two lines are charted together on the same time scale. The Price Phase Line is the upper line during upward price movements and the lower line during downward movements. The Signal Line, being an average of the Price Phase Line, is the lower line during upward moves and the upper line during downward moves.
As a general rule, it is considered bullish when the Price Phase Line is rising and is above the Signal Line. Conversely, it is bearish when the Price Phase Line is falling and is below the Signal Line.
Buy and sell signals are generated by the crossing of the two lines. In general, a buy signal occurs when the Price Phase Line crosses from below to above the Signal Line. A sell signal is indicated when the Price Phase Line crosses from above to below the Signal Line.
Because of its smoothed nature, this indicator can be helpful in highly volatile markets such as the options market. Although generally less effective during narrow, trendless markets, it provides good signals during widely swinging trading ranges and at the conclusion of strong trends.
MACDI is especially valuable for its ability to signal a turnaround following a sharp decline. In this situation, divergences are particularly significant and often predate important market bottoms. Divergences pertain to trends and occur when the trend of price action and the trend of an indicator are in opposite directions.
In addition to trend breaks, divergences, and Signal Line crossings, it is important to watch for overbought and oversold levels. When the MACDI rises above a certain level, the ticker is in an overbought region and a reversal is likely. The same is true in the oversold direction.
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