A bearish or bullish signal will be generated after the MACD crosses the signal line or the event - the direction of the cross will decide which signal is generated. Ultimately, the MACD describes how two moving averages relate. Using a 26-day and 12-day exponential moving average, a 9-day is also then used as the signal line which will be drawn on top of the MACD. When the MACD rises above this line, a bullish signal is generated and vice versa.
For markets that are strongly trending, this is a fantastic oscillator to use. When prices rise too fast and too far, this indicates an ‘overbought’ situation and it suggests a downward correction at any point. Similarly, an ‘oversold’ situation can arise when the prices fall too fast and too far where a correction would see an upward movement. When the MACD rises, this suggests that the price is too high and will see a reaction which will bring it down to regular levels.
When the MACD diverges from the price of the instrument, this is a sure sign that the trend may be coming to an end. When the MACD reaches new lows whilst the prices are not reaching the same lows, this marks a bearish divergence. When the opposite is true, this marks a bullish divergence.