the hAnDbook of technIcAl AnAlySISsignal Line Crossovers
Buy and sell signals may also be generated via signal line crossovers. A signal line
is a smoothed version of the original oscillator, that is, it is a moving average of the
original oscillator values. As such, it will lag the original oscillator action. Signals
are indicated as follows:
■ (^) Oscillator crossing above its signal line is a buy (bullish) signal
■ (^) Oscillator crossing below its signal line is a sell (bearish) signal
It is important to note that many practitioners consider an upside crossover
(oscillator crossing above its signal line) to be significantly more bullish if it occurs
in proximity to an oversold level. Similarly, a downside crossover (oscillator cross-
ing below its signal line) would be regarded as significantly more bearish if it occurs
around an overbought level. The defaulted signal line for the MACD is usually a
nine‐period exponential moving average of the MACD. Figure 8.9 depicts MACD
signal line crossovers generating buy and sell signals on the daily chart of Goldman
Sachs Group Inc., as seen at the vertical time lines. We see that the MACD signal
line crossovers are fairly effective in forecasting tops and bottoms in the stock.
price‐Oscillator Divergence
Divergence between price and the oscillator indicate potential bearish or bullish
reversals. Signals are indicated as follows:
■ (^) Standard bullish divergence between price and the oscillator is a bullish setup
awaiting price confirmation. It is represented by lower troughs in price being
accompanied by higher troughs in the oscillator. A potential upside reversal is
expected.
fIgure 8.9 MACD Signal Line Crossovers Generating Buy and Sell Signals on the
Daily Chart of Goldman Sachs Group Inc.
Courtesy of Stockcharts.com