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Sept. 25, 2021, 10:38 a.m. EDT

These stock trading signs can tell you when the market is overbought or oversold

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By Michael Sincere

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Be aware that MACD is a “lagging” or “backward-looking” indicator, which means its signals are delayed, but don’t let that deter you. When MACD yields a signal, it is often significant, especially if used on a weekly chart (versus the daily chart favored by short-term traders). 

MACD trading signals  

When MACD is viewed on a chart, there are two lines. The black line is referred to as the “MACD line.” The gray (or red) line is referred to as the “signal line.” Remember: the MACD line is the leader line, while the signal line is the laggard line.

In addition, a horizontal line runs across the chart called the “zero line” (0 line).  The main function of the zero line is to alert you to the primary trend of the underlying price action. 

At its most basic level, MACD generates four signals: 

Buy:  When the MACD line crosses above the zero line, it’s bullish. 

Buy:  When the MACD line crosses above the nine-day signal line, it’s bullish.  

Sell:  When the MACD line crosses below the zero line, it’s bearish.  

Sell:  When the MACD line crosses below the nine-day signal line, it’s bearish. 

Note: When both the MACD line and nine-day signal line move in the same direction (uptrend or downtrend), that is a stronger, more significant signal. 

The MACD-Histogram

One of the most powerful (but often ignored) additions to the MACD is the MACD-Histogram. It is a separate program that is used to gauge momentum. 

The histogram is a series of bar graphs at the bottom of the stock screen. If the bars move above the zero line, it means the underlying stock (or index) is gaining strength, i.e., momentum. If the bars move below the zero line, the stock or index is losing strength.  

Many beginning traders don’t realize that momentum always changes before price does. That is what makes MACD and the MACD-Histogram so valuable. Both indicators detect when momentum is weakening. It could also be a signal to become bullish if the histogram bars move above the zero line. 

Histogram signals 

  1. If the MACD-Histogram bar changes to a lighter color, it means that momentum is diminishing. It is not a sell signal; it simply means that enthusiasm for that particular stock is waning. 

  2. As mentioned earlier, if the histogram bar rises above the zero line, that is a buy signal. An uptrend may be developing. If the histogram bar drops below the zero line, that is a sell signal. A downtrend may be developing. 

False signals

Keep in mind that just because MACD generates a buy or sell signal, or that RSI is overbought or oversold, does not mean it is an actionable trade. Like that of any indicator, there are false signals. In addition, it’s essential that you confirm with other indicators before betting real money on a trade. 

Michael Sincere is the author of “Understanding Options” and “Understanding Stocks.” He also has a blog, The Weekly Trader ( ) .

More: Savvy stock traders use these 2 insider tips to know when to buy and sell

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