thE hAnDbook of tEchnicAL AnALySiSAs the MACD rises and falls, peaks and troughs will form, allowing for fur-
ther divergence analysis between the MACD and price itself.
Detrending can also take place between the MACD and its own signal line, thus
creating the MACD histogram. The histogram therefore represents a quantitative
measure of the amount or degree of divergence between the MACD and its own signal
line. Since the MACD itself is a product of detrending two moving averages, it follows
that the histogram represents a double detrended oscillator. Finally, one advantageous
property of detrending is that it removes or reduces lag, or latency, in the original
oscillator, and as a result, the detrended oscillator responds more rapidly to price
fluctuations. Double detrending creates an even more responsive oscillator. This is
particularly useful when attempting to analyze divergences at the lower wave degrees.
In Figure 9.63, we see the MACD indicator quantifying the difference in value
between the 12‐ and 26‐day EMAs. For example, at point X, the difference in value
between the two moving averages is found to be 20¢. Upon tracing a vertical line
between those two points on the moving averages, we see that it intersects the MACD
at the expected value of 20¢, indicating that the MACD is indeed representative of
the amount of convergence and divergence between the two moving averages and not
merely a qualitative tool. Notice that the trend component associated with the mov-
ing averages is absent from the MACD. In the same manner, the histogram quantifies
the difference between the MACD and its own signal line. In general, we observe that:
■ (^) Every time the MACD moves away from the zero or equilibrium level, we see
a trend in effect
■ (^) Every time the two moving averages diverge, a strong trend is present, and
when they converge, we notice a slowing of the trend
Figure 9.63 Creating Divergence from Detrending.
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