MACD Histogram

Signals from the MACD Indicator can tend to lag behind price movements. The MACD Histogram shows the divergence between the MACD and its reference line (the 9-day Exponential Moving Average) by normalizing the reference line to zero. As a result, the histogram signals can show trend changes well in advance of the normal MACD signal.

A buy signal is generated as the histogram crosses above the zero point. A sell signal is generated as the histogram crosses below zero.

Divergences: Buy and sell signals can also be generated by looking for positive and negative divergences between the MACD Histo and the underlying stock. Bearish divergency is one where the price is making a new high, but the Histo is failing to surpass a previous high. Bullish divergency is one where the price is making a new low, but the Histo is failing to surpass a previous low. This divergences may be and indication of an impending reversal.

Average Directional Movement Index (ADX)

Wilder's DMI (ADX) evaluate the strength of the current trend, be it up or down. It's important to detemine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.

DMI (ADX) is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.

DMI (ADX) can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and/or moves above 20, it is a sign that the trading range is ending and a trend could be developing. When ADX begins to weaken from above 40 and/or moves below 40, it is a sign that the current trend is losing strength and a trading range could develop.

DMI (ADX) is derived from two other indicators, also developed by Wilder, and should be used with them to reveal the nature of the trend: the plus Directional Indicator (+DI), the minus Directional Indicator (-DI).

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