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False NEG Diverg in MACD Histogram: SP-500 ??? Rate this Topic:
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rpw60
Posted : Wednesday, March 24, 2010 1:34:47 PM
Registered User
Joined: 10/7/2004
Posts: 40
Can anyone explain why Big NEG Diverg in MACD Histogram: SP-500 since March 2nd has yet to change rising slope of Price ADVANCE?

Roger
davidjohnhall
Posted : Wednesday, March 24, 2010 6:16:18 PM

Registered User
Joined: 6/6/2005
Posts: 1,157
Hi Roger,

The first answer I can think of is that the MACD divergence doesn't ever change price -- it's a representation of what is happening between two moving averages laid over price.  Asking why the divergence hasn't moved price would be like asking why hasn't the water changed the direction of the boat.  (I think -- we may need a better metaphor here LOL)

The second thought is -- that every method fails.  And there doesn't have to be a reason.  To think there is a reason why the negative divergence failed is to assume that the use of MACD and divergences is an exact science.  The divergence is a snapshot and price has yet to confirm -- which it has not.  Always wait for price to confirm. 

If you look at it that way then there has been no failure.  MACD is trelling you there's a divergence.  Which there is.  What you might be wondering is:

How long after a divergence does price usually react?
Do divergences always signal downturns?
Are divergences predictive of price movement?

Only by deep study into the nature of MACD and also divergences can you come to some of those answer.

Maybe someone else can offer a better explanation.  

David John Hall
diceman
Posted : Thursday, March 25, 2010 2:54:59 AM
Registered User
Joined: 1/28/2005
Posts: 6,049

One way to look at it is MACD is a filter.
It filters the signals/cycles that pass thru it.

Depending on your settings there are optimum cycles
for your MACD. (where it will work best)

When the cycle gets longer and turns into a trend it tends to "stress" the filter.
(think of tuning to a weak radio or TV station)

We can eliminate the problem by changing the filter settings.
Change your MACD setting from 12,26,9 to 30,60,30.


Thanks
diceman

 

 

Apsll
Posted : Thursday, March 25, 2010 4:49:01 AM

Registered User
Joined: 3/21/2006
Posts: 4,308
Rpw60. Changing the setting on MACDH to eliminate the divergence is not the answer. The divergence that you see is simply a result of the two moving averages coming closer together. This is to say that the short term average is starting to weaken and turn in reaction to price action. MACD is a momentum indicator and the divergence you see has not yet been resolved. Instead of trying to pretend that there is not a weakening of momentum in price by simply extending the value of the short term moving average, then the better choice would be to use fractals such as looking to the 3 day chart or the weekly.

It is true as Davidjohnhall mentions that no indicator is an island and when using them to make the decisions of "buy or sell" one must understand the risk factor involved and adjust your money management to account for this.

Thanks Apsll.
tdmartha
Posted : Thursday, March 25, 2010 12:27:30 PM
Registered User
Joined: 3/15/2010
Posts: 54
Dear rpw60, my name is Martha - let me introduce myself.  I have a degree in economics and mathematics.  I have been trading the markets for over 10 yrs, and currently I work with a couple of investments banks educatings their interns in the art of trading.

Sir, the sp-500 shows no divergence over MACD.  It would probably help you if you used the standard line MACD as the histogram is a little harder to read.
Change your settings to standard line MACD, and I think it will be easy to see.

I hope this helps.
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