Moving Average Convergence Divergence (MACD) Indicator

The MACD is one of the indicators I see people using frequently.  You can find how to calculate it on Investopedia.  It has a simple buy / sell signal, so there are only two ranges to consider rather than the three (which include a ‘neutral’ signal) as we’ve seen on other indicators.

I’ve applied the MACD to four stocks below (AAPL, BA, CAT, and XOM), for the period 2007 – 2016.  I find it to be a good period to use because it included a major sell-off as well as a strong rally.

Before looking at the specific results, let’s discuss what we would expect to see if the indicator has predictive value. We expect that whenever the indicator is ‘buy’, the average gain over the next N days will be greater than when the indicator is ‘sell’ over the same number of days.

In the table I’ve included values of N for 5 trading days, 30 trading days, and 110 trading days. Let’s see how the indicator worked out:

 AAPLBACATXOM
Days of 'buy'1426143813901468
Days of 'sell'1352134013881310
Avg 5 day return 'buy'0.66%0.38%0.31%-0.02%
Avg 30 day return 'buy'4.18%2.25%1.34%0.16%
Avg 110 day return 'buy'13.74%8.29%7.30%1.62%
Avg 5 day return 'sell'0.48%0.21%0.24%0.25%
Avg 30 day return 'sell'2.93%1.33%2.07%0.96%
Avg 110 day return 'sell'13.53%6.29%6.25%2.21%

 

For the next 5 trading days, 3 of the 4 stocks had better returns on a ‘buy’ signal than on a ‘sell’ signal, and the difference in gains were fairly significant.

For the next 30 trading days, 2 of the 4 stocks had better returns on a ‘buy’ signal than on a ‘sell’ signal.

For the next 110 trading days, 3 of the 4 stocks had better returns on a ‘buy’ signal than on a ‘sell’ signal, though the differences weren’t very large.

So it appears for short-term trading (over the next week), the MACD may have some useful predictive value.  It’s certainly worth a closer look to see if a practical trading strategy for an individual investor can be generated from it.

 

This is an analysis of past performance, but past performance is not a guarantee of future performance.

Comments / Questions: joseph AT StockMarketMovement.com