Have you ever heard of a little indicator called "MACD"? Today, I review the book Technical Analysis by Gerald Appel, the inventor of MACD. The book has a very wide range of issues, from broad economic indicators to using treasury yields to time select mutual fund purchases. The inventor of MACD has put together an impressive book full of highly practical trading techniques.

One of the most useful parts of the books is where Appel discusses MACD and how to apply it. Appel even discusses the times where MACD produces false signals and even includes advice on trying to endure and perhaps even avoid these false signals. Appel suggests that traders should use MACD to find the long-term trend such as in a weekly chart and then use this information in conjunction with a shorter time period like a daily chart. I have tested bullish and bearish convergences between MACD and underlying securities. I have found that it is indeed quite bullish when the indicator outpaces the underlying stock. The great thing about momentum divergences is that they often precede the actual stock movements and therefore work as leading indicators. Naturally, leading indicators are the name of the game. Anyway, Appel goes into detail about the application of MACD and it is highly detailed and worth looking into.

Another interesting point that Appel makes in his book is that when looking at trends, one should not just look at the cycles, but the actual slope of the lines as well as the angles. He believes that this information is highly relevant and highly tradable. We would like to test this further and perhaps give a more definitive opinion after the testing. Of course, we already know that divergences in MACD work quite well and this actually involves the slope of MACD versus the slop of the price line of a stock.

One part of the book that shows Appel's versatility is his chapter on various cycles including time, political, and seasonal cycles. Appel suggests once again the that looking at slope and angle of certain trends will assist in predicting its duration. Appel also believes that there are 9 dominant cycles that are important to trading and he discusses how to use them.

One of Appel's central points is that using multiple indicators is usually the effective way to get the best bang for the trader's buck. The tests that I have conducted suggest that combining indicators often dissipates the effectives of a trading strategy because usually one of the indicators is more effective than the other. I do believe in synergizing certain trading methods though. For example, whenever possible I try to focus on high volume options in addition to the use of certain technical indicators. It is the synergizing of the indicators themselves that I am cautious with. Some combinations work, and some do not.

If you have an interest in mutual funds (almost everybody own mutual funds), take a look at how Appel looks at the NASDAQ's relative strength next to NYSE stocks and treasury yields to pick mutual funds. We've already found that comparing the NASDAQ's relative strength to the SPX has been highly effective. Overall, the book is highly informative and I have to give it the Big Trends thumbs up. Appel has data to back up his ideas and his logic is very sound.

Price Headley is the founder and chief analyst of BigTrends.com.