Thursday, 7 February 2019

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MACD Divergences

Bearish Divergence:
Bearish divergence occurs when a technical analysis indicator is recommending that a price should be going down but the price of the stock, future is continuing to maintain its current uptrend.
Bullish Divergence:
Bullish divergence occurs when the indicator is indicating that price should be bottoming and heading higher, yet the actual price action is continuing downward.

These divergences might signal a trader to get out of a long or short position before profits corrode. The following chart of the E-mini S&P 500 Index Future shows some of these divergences: 

High #1 to High #2
In the E-mini S&P 500 future, from High #1 to High #2, the futures contract made higher highs, which is usually viewed as bullish. However, the MACD moving average failed to make a new high. This bearish divergence acted as an early warning sign of things to come with the E-mini S&P 500 futures contract.
Low #1 to Low#2
 In yet another bearish sign for the E-mini S&P 500 futures contract, the future made higher lows from Low #1 to Low #2, which again is usually considered positive. Nevertheless, the MACD technical indicator made a clear lower low from Low #1 to Low #2. This bearish divergence warned of the impending downturn of the S&P 500 future and the market as a whole.
Low #2 to Low #3
In addition to bearish and bullish divergences, the MACD might confirm price movement as well. The E-mini S&P 500 futures contract made a substantial lower low which was confirmed by the MACD when it made a lower low as well. As seen throughout the MACD sections, the MACD is a versatile tool giving a trader possible buy and sell entries and giving warnings of potential price changes.

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