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The MACD histogram is the name given to the difference in value between the solid line and the dotted line. It is created by subtracting the numeric value of the dotted line from the numeric value of the solid line. This represents the space between the solid and dotted lines and takes the shape of an oscillator that moves above and below a zero line. The zero line denotes the point at which the solid and dotted lines of the MACD indicator cross.

By changing the oscillator line–style from a solid to a histogram, it becomes easy to discern when the solid MACD line goes positive or negative. When the bars of the histogram are above its zero line, the solid line is above the dotted line; when the histogram is below its zero line, then the solid line is below the dotted line. The histogram makes it easier to verify the 14 or more price bar count preceding the end of the alert pattern.

Look at the Boeing stock again, this time in Figure 4 with the histogram added. It verifies not only the bar count, but shows when the solid line moves above or below the dotted line and whether the solid line penetrated the dotted line during the pullbacks or rallies.

Rule 2: Once a bar count of 14 or more has been confirmed, check the numeric value of the histogram to determine the extent of the move toward the dotted line. The histogram bars contract as the space between the solid and dotted lines decrease. Ideally, during pullback/rally alerts, the histogram maintains a numeric value bounded by +0.01 and +0.15 above its zero line, or -0.01 and -0.15 below its zero line. The daily price chart of the June 1998 US dollar contract illustrates a valid histogram contraction during the alert (Figure 5). The histogram bars were shortened to -0.02 in the April– May solid line countertrend rally alert. Although the histogram decreased in value to an acceptable alert level in the May pullback, the bar count was less than 14. The pullback in June, however, met the criteria for both the bar count and the amount of histogram contraction to produce a valid alert.

Remember to use the MACD numeric values rather than the histogram values to determine turning points at the alerts and PTX to avoid a different type of false signal.

VARIATIONS FOR THE BRAVE OF HEART

The alert and profit-taking patterns shown thus far are based on ideal formations. Even though the ideal occurs often enough to make it worthwhile to check for the pattern, a few variations pop up but are riskier to trade. For example, sometimes the solid line merges with the dotted line during an alert instead of approaching the dotted line and then moving away, as the ideal requires (Figure 6). Sometimes this will resolve itself and the line will continue in the desired direction. On occasion, however, it may also serve as a precipice from which prices bounce or plunge in the undesired direction.

Another variation occurs when the solid line dips briefly below the dotted line. Many times, the penetration of the dotted line is short-lived and prices turn around, as they did with the June 1998 S&P 500 contract (Figure 7). The solid line pulled back and penetrated the dotted line on March 5, 1998, which should have negated the alert. But the next day, the MACD numeric value increased, as did price. The solid line and price continued to rise, even though the histogram remained below its zero line.

So follow the histogram or follow the solid line? In this case, the solid line proved to be the better choice, as the histogram confirmed on March 11. The PTX took effect approximately two weeks later at a much higher closing price. Risky? You bet! It is best to be cautious with this pattern variation.