By Ric Spooner, Chief Market Analyst, CMC Markets Australia
Source: CMC Markets
A useful rule with MACD divergences is to look for situations where divergence is starting a long way from the zero line. It’s a bit more difficult to eyeball this with MACD than with other oscillators like the RSI which are expressed in percentage terms.
With the RSI you can look for divergence set ups starting out of the overbought zone above 70% or the oversold zone below 30%. MACD is an absolute number rather than a percentage so it pays to scroll back through a bit of chart history to get a bead on whether the divergence is starting from an unusually high level or a relatively low level.
While MACD can be a little more cumbersome in this regard, it has other advantages, the biggest of which is that it’s a combined momentum oscillator and trend indicator.
So to return to this EURUSD
analysis, the MACD has started to fall away, making lower highs while price is still making higher highs. This divergence has the advantage of starting from a high level compared to earlier peaks in this uptrend.
Divergence basically indicates that upward momentum is being lost. This often happens before a trend changes from up to neutral or down.
In this case, the trend indicator on the MACD is already indicating an emerging downtrend with the MACD now below its red technical signal line (or if you prefer, the histogram bars below 0).
As I write the market is drifting sideways as it often does in the Asian time zone. However a move below the dashed support line and the first peak in this 3 peak pattern might give greater comfort that a downtrend and correction of the recent rally appears to be getting underway.