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| MACD Zero
Line |
MACD CROSSES OF THE ZERO
(CENTER) LINE
Throughout our last several Swing Trader issues I have commented
on a possible MACD cross of the zero, or center, line. This is an
extremely important signal that in the past has marked vital transitions
from bull to bear markets (and vice versa). I want to review the history
of that signal with you in an effort to get you to fully appreciate its
significance.
I review the calculation behind MACD in my special report -- "MACD:
My Desert Island Indicator." I won’t repeat the full
details here, but I will remind you that MACD is calculated by
subtracting a 26-period exponentially smoothed moving average from a
12-period moving average. I call the line that is formed the "main
line." A nine-period moving average of the main line then becomes
the trigger for buy and sell signals.
The zero, or center line, crossover occurs when the 12- and 26- period
moving averages move either below or above each other. As with all
moving average signals, when the shorter moving average crosses above
the longer, it provides traders with a bullish signal. Meanwhile, the
reverse is bearish. Note that the center line crossover is independent
of whether MACD is itself on a buy or sell signal, since it does not
incorporate the 9-period smoothing line.
Below you'll find a weekly chart of the S&P 500 dating back nearly
six years to January 1998. In the last six years, we have only seen
three crossovers of the MACD zero line! Each time it has heralded a
major move in the market. As such, this is a signal you don't want to
ignore. (In all the technical analysis reading I do on the web, I
have found no other commentators who have mentioned this signal. Swing
Trader subscribers are the only traders I am aware of to be apprised
of this information.)
In addition to the three crossovers, MACD has approached the zero line
on three other occasions. In each of these instances, however, this line
has served as either support or resistance and has turned MACD back. The
crossovers are labeled 1, 2 and 3. The support/resistance approaches are
marked A, B and C.
The first cross of the zero line at "1"
occurred in the Fall of 1998 with the S&P near 1100. MACD rose to an
overbought level of 50 on its scale and began to show bearish
divergence, as MACD trended down while the S&P itself continued to
rise. At point "A" in late 2000, a sharp Intermediate
correction brought the S&P from just over 1400 back to just north of
1200 in the span of just a few months. Note how the zero line served as
support on this correction. When MACD gave a buy signal just after
"A" -- soon after the test of the zero line -- a fierce rally
ensued.
After nearly two years of bearish divergence, MACD finally broke through
the zero line at point "2" in the Fall of 2002. The signal was
given at approximately the 1400 level on the S&P. An investor who
heeded this bearish crossover would have avoided the deepest bear market
since the 1930s. The S&P lost almost -50% of its value before
hitting bottom in October 2002 at 768. It is worth observing that in
early 2002 at "B," MACD rallied back to the zero line and that
level served as resistance. During late 2002 to early 2003 the index
peaked on three separate occasions between 1173 and 1177. That level is,
of course, just above the March 2004 peak of 1163.23 and is a resistance
level the index is still struggling to overcome!
I have discussed numerous times in this newsletter the triple-bottom
formation that took place between July 2002 and March 2003 -- a
formation that officially ended the bear market. Note that during that
time, MACD showed bullish divergence -- the mirror image of the bearish
divergence of 1999-2001.
The bullish cross of the zero line occurred in late Spring of 2003
(point "3") near the 965 level on the S&P. The penetration
of this key resistance level completed the triple-bottom formation. The
S&P remained in strong rally mode until March 2004. Since that time,
however, the index has made a series of lower peaks and lower valleys --
indicative of an Intermediate downtrend. As seen at point "C,"
MACD retreated below the zero line in August 2004 before rallying
slightly over the last couple of months.
At present, weekly MACD is at 2 on its own scale and has
managed to hover just above the zero line. The next major move in this
indicator will be a telltale sign of whether the market is going to
return to technical health or whether another bear market will ensue.
If the market is to become healthy again, then there should be a
bounce off the MACD zero line and MACD should return to a buy signal.
If a bear market is upon us, then MACD should go below the zero line and
start trending down again. As of now, the final outcome is still in
doubt. However, you can be assured I will be watching this indicator
microscopically for the first hints of its coming direction. Swing
Trader subscribers will be the first to know my conclusions!
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