Gerald Appel

Gerald Appel is a celebrated investment analyst, author, and money manager, best known as the brilliant mind behind the Moving Average Convergence Divergence (MACD). Developed in the late 1970s, the MACD has become one of the most widely used indicators in the world of technical analysis. Appel's work is characterized by a pragmatic and quantitative approach, focusing on creating simple, rule-based systems to identify trends and momentum in financial markets. While his methods are rooted in analyzing price charts and market data rather than company balance sheets, his tools have earned a place in the toolkit of many investors, including those who wouldn't primarily call themselves technical analysts. He founded Signalert Corporation, an investment research and money management firm, and for decades published the influential newsletter Systems and Forecasts, cementing his legacy as a pioneer in developing practical, data-driven trading strategies.

While the world of value investing often focuses on what to buy, Gerald Appel dedicated his career to helping investors with the tricky question of when to buy or sell. His work provides a lens to view market psychology and momentum, which even the most disciplined value investor must contend with.

At its heart, the MACD (pronounced “Mac-Dee”) is a trend-following momentum indicator. Think of it as a way to visualize the relationship between a stock's recent price trend and its more established, longer-term trend. It's designed to reveal changes in the strength, direction, and duration of a price trend. It does this by taking two different moving averages and plotting the difference between them. The indicator is typically displayed as three components on a stock chart:

• The MACD Line: This is the engine of the indicator. It measures the distance between a short-term moving average and a longer-term one. When it's rising, it shows that short-term momentum is getting stronger.
• The Signal Line: This is a moving average of the MACD Line itself. It acts as a smoother, slower-moving reference point. The real “signals” are generated when the faster MACD line crosses over this slower Signal Line.
• The Histogram: This is a simple bar chart that illustrates the distance between the MACD Line and the Signal Line. When the bars are tall, momentum is strong; when they shrink, momentum is fading.

Investors watch for a few key events on the MACD chart:

1. Crossovers: The most basic signal. When the MACD Line crosses above the Signal Line, it's considered a bullish signal, suggesting upward momentum is building. A cross below is bearish, suggesting momentum is shifting downwards.
2. Divergence: This is a more advanced and powerful signal. A divergence occurs when the stock's price makes a new high, but the MACD indicator fails to do so. This warns that the underlying momentum is weakening, and the price trend could be about to reverse.
3. Centerline Crossover: When the MACD Line crosses above the zero line, it signifies that the short-term average price has moved above the long-term average, a general sign that the security may be entering an uptrend.

How does a technical tool like the MACD fit into a value investing framework championed by legends like Benjamin Graham and Warren Buffett? The key is to see it for what it is: a supplementary tool, not a core philosophy. A value investor's primary job is to determine a business's intrinsic value. Appel's MACD does not help with this. Where it can be useful is in timing and risk management. Imagine you've done your homework and found a wonderful business trading at a fair price. You could use the MACD to:

• Refine an Entry Point: Instead of buying immediately, you might wait for a bullish crossover on the MACD, suggesting that the negative sentiment pushing the stock down may be subsiding. This can help avoid the classic mistake of “catching a falling knife.”
• Identify Waning Enthusiasm: If you own a stock that has run up significantly, a bearish divergence on the MACD could be a signal to re-evaluate your position and perhaps trim some profits, especially if the price is approaching your estimate of its intrinsic value.

Bold rule of thumb: Never make an investment decision based on the MACD alone. Your analysis of the business must always come first. Gerald Appel gave the world a brilliant tool for understanding Mr. Market's mood, but it's the value investor's job to know the true worth of the merchandise he is selling.