The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Window Oscillators and Overlay Indicators

The MOM oscillator does not exhibit the non‐linearity experienced by ROC

oscillators. When prices are flat or beginning to flat line, the MOM will decline

to zero. For the MOM to remain flat, price needs to be rising at a steady rate. If

MOM is rising, this indicates that price is accelerating, with respect to prices N

periods ago.

The MOM may be analyzed for buy (bullish) and sell (bearish) signals using

any of the eight forms of oscillator analysis described in a previous section. In

most ways, it is identical to ROC action.

MaCD and MaCD histogram

Created by Gerald Appel, the MACD stands for moving average convergence

divergence. The MACD is created by detrending two moving averages with each

other and plotting the difference as a window oscillator. Detrending removes the

trend component, leaving only the difference in values. In the case of the MACD,

detrending is simply the subtraction of the values of the 26‐period exponential

moving average from the 12‐period exponential moving average.

MACD== 12 - periodEMA− 26 - periodEMA

In Figure 8.16, we notice that every time the 12‐day EMA tests or crosses the

26‐day EMA, the MACD line tests the zero level (refer to the solid vertical arrows).

This is because the difference between the two EMAs is zero. Whenever the two

EMAs start to diverge, the MACD starts to move away from the zero line, and when

they converge the MACD moves toward its zero level. If the 12‐period EMA crosses

above the 26‐period EMA, the MACD rises above the zero level, and whenever the

fIgure 8.18 ROC Action of the Daily Chart of Goldman Sachs Group Inc.

Courtesy of Stockcharts.com