You’ve heard a lot of talk lately about the “broken” MACD indicator. Often referred to as the Moving Average Convergence Divergence (MACD) indicator, this tool is commonly used in technical analysis to measure momentum in the price of a stock or other financial instruments. But what does a broken MACD mean and how should investors respond?
In a nutshell, a broken MACD suggests that momentum is shifting in one direction or another. When the MACD is rising, it means that momentum is shifting up and when the MACD is falling, it suggests momentum is shifting down. When the MACD is broken, it means that the momentum has moved so far in one direction that the indicator is having a hard time keeping up. This often means that the trend in the price of a security is over and that traders need to start finding other clues to determine the overall direction of the market.
When the MACD is broken, investors should focus on evaluating potential new entry and exit points. One way to do this is to look for divergences in the MACD. For example, if the MACD is breaking down, but the price of a security continues to rise, traders should look for a bullish crossover as a potential entry point. Similarly, if the MACD is breaking up, but the price of a security begins to drop, traders should look for a bearish crossover as a potential exit point.
In addition, investors should look to other indicators to confirm any potential new entry or exit points. This could involve looking at the strength index, volume, or other technical indicators. A combination of indicators using different timeframes can also help traders identify potential entry and exit points.
By incorporating some simple strategies, investors can protect their portfolios and take advantage of any potential changes in market momentum once the MACD is broken.