The MACD (moving average convergence/divergence) was developed by Gerald Appel. It is a momentum indicator that plots the difference between two moving averages (the 26-day and 12-day EMAs are most often used) and a third MA (usually the 9-day EMA). This 3 rd MA is the signal or reference line.
The MACD is most effective in wide-swinging trending markets and tends to lag price movements. It has a couple popular uses.
Crossovers – some traders will buy when the MACD crosses over it's signal line and sell or sell short when it cross down through its signal line. They will also look to buy and sell when the MACD crosses up or down through the zero line.
Divergence – The MACD will generally lag the underlying price slightly (i.e. when a stock moves up so will the MACD but slightly delayed), but when a divergence occurs where the MACD fails to confirm the underlying issue's movement, the stock price typically reverses. So if a stock is rallying and the MACD tops out and starts to head down, a big hint is being given that the stock , too , will top out soon. On the other hand, if a stock falls but the MACD flattens out and starts to move up, a near-term bottom in the stock is likely.