Financial Indicators: A guide to MACD and RSI using Bloomberg Interactive Charts

Accurate and minutely predicting any market movements is impossible in general and particularly so to the common man. Notwithstanding this, there are some pointers available. Fortunately, Bloomberg generously provides several “indicators” that can be used in parallel to the indices, prices, yields and rates it provides to make some general inferences about the momentum and direction of market changes.
These variables fall under a discipline called Technical Analysis, which uses statistical methods to make inferences about financial markets. Technical Analysis itself can be considered to be a subgroup of a field called Signal Processing mostly relevant for engineering, telecoms and seismology, but also for financial analysts. 

In the lines below I mostly quote wikipedia pages about two particular indicators: Moving Average Convergence-Divergence (MACD) and Relative Strength Index. These are generously provided by Bloomberg for free on their website.

This post is provided in the hope that it will help close the gap between established professionals and amateurs or aspirant analysts.

Bloomberg Interactive Tools

Let’s assume you are interested in studying developments in stock markets. To this effect you could decide to investigate the NYSE-Euronext index. One easy and cheap way to do this would be to use Bloomberg Interactive Charts. You can go to the Data section of this website and find links to selected Bloomberg compiled data there or simply access it through Bloomberg’s website. There you can choose from a vast array of lists of financial variables normally organised by country.

Once you select you variable, you will eventually find your way to the Interactive Chart. Initially, all interactie charts provide the variable chosen accompanied by the volume of trades below. It will look something like this:

To get the MACD and the RSI, you must scroll the mouse arrow over to “INDICATORS”, left-click on it to get the list of indicators and left click on the relevant ones to select and de-select them.

Now, on to the reading and interpreting …

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MACD: Moving Average Convergence Divergence

• Calculation & Translation of Wikipedia’s “basics” to Bloomberg’s notation:
  • MACDS = 9 day exponential moving average (EMA) [PURPLE] – “Signal line”
  • MACD  = Difference between 26 and 12 day EMA [Orange]
  • MACD2 = MACD – MACDS

This is a commonly discussed indicator, whose interpretation can be quite useful.

• Interpretation

• Signal Line Cross-over: Signal line cross overs occur when MACD goes over MACDS, thus leading to changes in the sign of MACD2.
  • Buy when MACD2 becomes >0, because it indicates the beginning of a bull market; Sell when MACD2 becomes < 0, because it indicates the beginning of a bear market
• Zero Cross-over: A MACDmove from positive to negative is bearish and from negative to positive, bullish.
  • Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover.
• Divergence: Divergence refers to a discrepancy between the highs and lows of the MACD line and the graph of the stock price.
  • Positive divergence between the MACD and price arises when price hits a new low, but the MACD doesn’t. This is interpreted as bullish, suggesting the downtrend may be nearly over.
  • Negative divergence is when the stock price hits a new high but the MACD does not. This is interpreted as bearish, suggesting that recent price increases will not continue.

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RSI: Relative Strength Index      [not to be confused with Relative Strength (RS)]

• Calculating the RSI requires the calculation of the RS.
  • RS = [EMA(Upwards)/EMA (Downwards)] over some common trading period (normally 14 days).
  • EMA(Upwards) and EMA(Downwards) are calculated on the basis of the differences between indices/rates/yields/prices between the closing of trading days.
  • RSI = 100 – 100/(1+RS)

This is a very common indicator, widely used by professional analysts.

• Interpretation
  • “The slope of the RSI is directly proportional to the velocity of a change in the trend”
  • “Wilder believed that tops and bottoms are indicated when RSI goes above 70 or drops below 30:
    •  Traditionally, RSI readings greater than the 70 level are considered to be in overbought territory, and
    • RSI readings lower than the 30 level are considered to be in oversold territory.
    • In between the 30 and 70 level is considered neutral, with
    • the 50 level a sign of no trend:
      • When the Relative Strength Index is below 50, it generally means that the stock’s losses are greater than the gains.
      • When the Relative Strength Index is above 50, it generally means that the gains are greater than the losses.”
  • Divergence: “Wilder believed that divergence between RSI and price action is a very strong indication that a market turning point is imminent:
    •  Bearish divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to confirm.
    • Bullish divergence occurs when price makes a new low but RSI makes a higher low.”
  • Market Reversals: “Wilder thought that “failure swings” above 70 and below 30 on the RSI are strong indications of market reversals.
    • For example, assume the RSI hits 76, pulls back to 72, then rises to 77. If it falls below 72, Wilder would consider this a “failure swing” above 70.”
  • Uptrends and Downtrends: “Cardwell noted that bearish divergence:
    • 1) only occurs in uptrends, and
    • 2) mostly only leads to a brief correction instead of a reversal in trend.
    • Therefore bearish divergence is a sign confirming an uptrend. Similarly, bullish divergence is a sign confirming a downtrend.”
  • Reversals are the opposite of divergence. Cardwell discovered the existence of positive and negative reversals in the RSI:
    • A positive reversal occurs when an uptrend price correction results in a higher low compared to the last price correction, while RSI results in a lower low compared to the prior correction.
    • A negative reversal happens when a downtrend rally results in a lower high compared to the last downtrend rally, but RSI makes a higher high compared to the prior rally.

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All of these indicators can provide false negatives and false positives thus exposing the analyst to type II errors.

Due to the fact that these indicators are calculated on the basis of averages, the minimum period of analysis for which Bloomberg interactive charts allow you to use them is for 1 month.