MACDHistogram
In 1986, Thomas Aspray developed the MACDHistogram. Some of his findings were presented in a series of articles for Technical Analysis of Stocks and Commodities. Aspray noted that MACD's lag would sometimes miss important moves in a security, especially when applied to weekly charts. He first experimented by changing the moving averages and found that shorter moving averages did indeed speed up the signals. However, he was looking for a means to anticipate MACD crossovers. One of the answers he came up with was the MACDHistogram.
Definition and Construction
The MACDHistogram represents the difference between the MACD and its trigger line, the 9day EMA of MACD. The plot of this difference is presented as a histogram, making centerline crossovers and divergences easily identifiable. A centerline crossover for the MACDHistogram is the same as a moving average crossover for MACD. If you will recall, a moving average crossover occurs when MACD moves above or below the trigger line.
If the value of MACD is larger than the value of its 9day EMA, then the value on the MACDHistogram will be positive. Conversely, if the value of MACD is less than its 9day EMA, then the value on the MACDHistogram will be negative.
Further increases or decreases in the gap between MACD and its trigger line will be reflected in the MACDHistogram. Sharp increases in the MACDHistogram indicate that MACD is rising faster than its 9day EMA and bullish momentum is strengthening. Sharp declines in the MACDHistogram indicate that MACD is falling faster than its 9day EMA and bearish momentum is increasing.
On the chart above, we can see that the MACDHistogram movements are relatively independent of the actual MACD. Sometimes the MACD is rising while the MACDHistogram is falling. At other times, the MACD is falling while the MACDHistogram is rising. The MACDHistogram does not reflect the absolute value of the MACD, but rather the value of the MACD relative to its 9day EMA. Usually, but not always, a move in the MACD is preceded by a corresponding divergence in the MACDHistogram.

The first point shows a sharp positive divergence in the MACDHistogram that preceded a Bullish Moving Average Crossover.

On the second point, the MACD continued to new Highs but the MACDHistogram formed two equal Highs. Although not a textbook case of Positive Divergence, the equal High failed to confirm the strength seen in the MACD.

A Positive Divergence formed when the MACDHistogram formed a higher Low and the MACD continued lower.

A Negative Divergence formed when the MACDHistogram formed a lower High and the MACD continued higher.
Usage
Thomas Aspray designed the MACDHistogram as a tool to anticipate a moving average crossover in the MACD. Divergences between MACD and the MACDHistogram are the main tool used to anticipate moving average crossovers. A Positive Divergence in the MACDHistogram indicates that the MACD is strengthening and could be on the verge of a Bullish Moving Average Crossover. A Negative Divergence in the MACDHistogram indicates that the MACD is weakening, and it foreshadows a Bearish Moving Average Crossover in the MACD.
In his book, Technical Analysis of the Financial Markets, John Murphy asserts that the best use for the MACDHistogram is in identifying periods when the gap between the MACD and its 9day EMA is either widening or shrinking. Broadly speaking, a widening gap indicates strengthening momentum and a shrinking gap indicates weakening momentum. Usually a change in the MACDHistogram will precede any changes in the MACD.
Signals
The main signal generated by the MACDHistogram is a divergence followed by a moving average crossover. A bullish signal is generated when a Positive Divergence forms and there is a Bullish Centerline Crossover. A bearish signal is generated when there is a Negative Divergence and a Bearish Centerline Crossover. Keep in mind that a centerline crossover for the MACDHistogram represents a moving average crossover for the MACD.
Divergences can take many forms and varying degrees. Generally speaking, two types of divergences have been identified: the slant divergence and the peaktrough divergence.
Slant Divergence
A Slant Divergence forms when there is a continuous and relatively smooth move in one direction (up or down) to form the divergence. Slant Divergences generally cover a shorter time frame than divergences formed with two peaks or two troughs. A Slant Divergence can contain some small bumps (peaks or troughs) along the way. The world of technical analysis is not perfect and there are exceptions to most rules and hybrids for many signals.
PeakTrough Divergence
A peaktrough divergence occurs when at least two peaks or two troughs develop in one direction to form the divergence. A series of two or more rising troughs (higher lows) can form a Positive Divergence and a series of two or more declining peaks (lower highs) can form a Negative Divergence. Peaktrough Divergences usually cover a longer time frame than slant divergences. On a daily chart, a peaktrough divergence can cover a time frame as short as two weeks or as long as several months.
Usually, the longer and sharper the divergence is, the better any ensuing signal will be. Short and shallow divergences can lead to false signals and whipsaws. In addition, it would appear that Peaktrough Divergences are a bit more reliable than Slant Divergences. Peaktrough Divergences tend to be sharper and cover a longer time frame than Slant Divergences.
MACDHistogram Benefits
The main benefit of the MACDHistogram is its ability to anticipate MACD signals. Divergences usually appear in the MACDHistogram before MACD moving average crossovers do. Armed with this knowledge, traders and investors can better prepare for potential trend changes.
The MACDHistogram can be applied to daily, weekly or monthly charts. (Note: This may require some tinkering with the number of periods used to form the original MACD; shorter or faster moving averages might be necessary for weekly and monthly charts.) Using weekly charts, the broad underlying trend of a stock can be determined. Once the broad trend has been determined, daily charts can be used to time entry and exit strategies. In Technical Analysis of the Financial Markets, John Murphy advocates this type of twotiered approach to investing in order to avoid making trades against the major trend. The weekly MACDHistogram can be used to generate a longterm signal in order to establish the tradable trend. Then only shortterm signals that agree with the major trend would be considered.
After the trend has been established, MACDHistogram divergences can be used to signal impending reversals. If the longterm trend was bullish, a negative divergences with bearish centerline crossovers would signal a possible reversal. If the longterm trend was bearish, traders would watch for a positive divergences with bullish centerline crossovers.
On the IBM weekly chart, the MACDHistogram generated four signals. Before each moving average crossover in the MACD, a corresponding divergence formed in the MACDHistogram. To make adjustments for the weekly chart, the moving averages have been shortened to 6 and 12. This MACD is formed by subtracting the 6week EMA from the 12week EMA. A 6week EMA has been used as the trigger. The MACDHistogram is calculated by taking the difference between MACD (6/12) and the 6day EMA of MACD (6/12).

The first signal was a Bearish Moving Average Crossover in January, 1999. From its peak in late November, 1998, the MACDHistogram formed a Negative Divergence that preceded the Bearish Moving Average Crossover in the MACD.

The second signal was a Bullish Moving Average Crossover in April. From its low in midFebruary, the MACDHistogram formed a Positive Divergence that preceded the Bullish Moving Average Crossover in the MACD.

The third signal was a Bearish Moving Average Crossover in late July. From its May peak, the MACDHistogram formed a Negative Divergence that preceded a Bearish Moving Average Crossover in the MACD.

The final signal was a Bullish Moving Average Crossover, which was preceded by a slight Positive Divergence in the MACDHistogram.
The third signal was based on a Peaktrough Divergence Two readily identifiable and consecutive lower peaks formed to create the divergence. The peaks and troughs on the previous divergences, although identifiable, do not stand out as much.
MACDHistogram Drawbacks
The MACDHistogram is an indicator of an indicator or a derivative of a derivative. The MACD is the first derivative of the price action of a security, and the MACDHistogram is the second derivative of the price action of a security. As the second derivative, the MACDHistogram is further removed from the actual price action of the underlying security. The further removed an indicator is from the underlying price action, the greater the chances of false signals. Keep in mind that this is an indicator of an indicator. The MACDHistogram should not be compared directly with the price action of the underlying security.
Because MACDHistogram was designed to anticipate MACD signals, there is a temptation to jump the gun. The MACDHistogram should be used in conjunction with other aspects of technical analysis. This will help to alleviate the temptation for early entry. Another means to guard against early entry is to combine weekly signals with daily signals. Of course, there will be more daily signals than weekly signals. However, by using only the daily signals that agree with the weekly signals, there will be fewer daily signals to act on. By acting only on those daily signals that are in agreement with the weekly signals, you are also assured of trading with the longer trend and not against it.
Be careful of small and shallow divergences. While these may sometimes lead to good signals, they are also more apt to create false signals. One method to avoid small divergences is to look for larger divergences with two or more readily identifiable peaks or troughs. Compare the peaks and troughs from past action to determine significance. Only peaks and troughs that appear to be significant should warrant attention.
