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Cementation of the MACD Lines, Part 1 by kensey |
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Pacificare Health Sys
Inc Cl B (PHSYB)    |
When there is absolutely no change in price, MACD gets a little less useful and signals with a bit of a knee jerk; it tends to react emotionally rather than wisely. In the case of Pacificare Health Systems, prices are increasing constantly, at a rate of approximately 1/4 point each day. Constant change is reflected in MACD as the cementing of the lines which then trace horizontally across that indicator graph. The level at which the lines cement is indicative of the health at that level. It's more of a phenomenon, or something you can dissect in a lab than something you can trade by, but if you are vested when cementing occurs, you have a nice easy ride ahead of you. Cementing is often accompanied by diminishing volume. This is not a bearish occurrence. It simply means that existing holders of stock are not finding any reason to sell, and there is not enough news or change in the fundamental outlook in the company to attract new blood. This makes sense as volume in quantity often carries a bias that would push the stock in one direction or another. As it stands, an existing bias that was established earlier is carrying through to sustain the movement forward. |
MACD will be extremely reactive to this situation. A change in prices the least bit down will cause an existing MACD green trending bar to be taken down, and any increase in prices above the seemingly built-in flat rate of increase will cause a new green bar to be born. But owing to the dynamic that is causing cementing to occur in the first place, prices will navigate back to the state (of normalcy) where the constant rate of change applies, and the trending bar will appear, in retrospect, to be ill-timed. The reason I am pointing this out is that understanding this aids in a better understanding of MACD. MACD is good at pointing out divergences in prices. This means it will tell you when a stock that is in a downtrend is starting to turn around and begin an uptrend. MACD is therefore good at identifying points at which turns are being made, but not great when the road is straight ahead.
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