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Chaikin A/D Oscillator
Description
The Chaikin Oscillator is created by subtracting a 10-period
exponential moving average of the Accumulation/Distribution Line
from a 3-period moving average of the Accumulation/Distribution
Line. The formula equivalent of the calculation is shown below:
mov( ad(), 3, E) - mov( ad(), 10, E)
Interpretation
The following article on volume accumulation/distribution
interpretation, written by Mr. Marc Chaikin, is reprinted here.
Technical analysis of both market averages and stocks must include
volume studies in order to give the technician a true picture of the
internal dynamics of a given market. Volume analysis helps in
identifying internal strengths and weaknesses that exist under the
cover of price action. Very often, volume divergences versus price
movement are the only clues to an important reversal that is about
to take place. While volume has always been mentioned by technicians
as important, little effective volume work was done until Joe
Granville and Larry Williams began to look at volume versus price in
the late 1960s in a more creative way.
For many years it had been accepted that volume and price normally
rose and fell together, but when this relationship changed, the
price action should be examined for a possible change of trend. The
Granville OBV concept which views the total volume on an up day
as accumulation and the total volume on a down day as
distribution is a decent one, but much too simplistic to be of
value. The reason is that there are too many important tops and
bottoms, both short-term and intermediate-term, where OBV confirms
the price extreme. However, when an OBV line gives a divergence
signal versus a price extreme, it can be a valuable technical signal
and usually triggers a reversal in price.
Larry Williams took the OBV concept and improved on it. In order to
determine whether there was accumulation or distribution in the
market or an individual stock on a given day, Granville compared the
closing price to the previous close, whereas Williams
compared the closing price to the opening price. He
[Williams] created a cumulative line by adding a percentage of
total volume to the line if the close was higher than the opening
and, subtracting a percentage of the total volume if the close was
lower than its opening price. The accumulation/distribution line
improved results dramatically over the classic OBV approach to
volume divergences.
Williams then took this one step further in analyzing the Dow Jones
Industrials by creating an oscillator of the
accumulation/distribution line for even better buy and sell signals.
In the early 1970s, however, the opening price for stocks was
eliminated from the daily newspaper and Williams' formula became
difficult to compute without many daily calls to a stockbroker with
a quote machine. Because of this void, I created the Chaikin
Oscillator substituting the average price of the day for Williams'
opening and took the approach one step further by applying the
oscillator to stocks and commodities. The Chaikin Oscillator is an
excellent tool for generating buy and sell signals when its action
is compared to price movement. I believe it is a significant
improvement over the work that preceded it.
The premise behind my oscillator is three-fold. The first premise is
that if a stock or market average closes above its midpoint for the
day (as defined by [high+low]/2), then there was accumulation on
that day. The closer a stock or average closes to its high, the more
accumulation there was. Conversely, if a stock closes below its
midpoint for the day, there was distribution on that day. The closer
a stock closes to its low, the more distribution there was.
The second premise is that a healthy advance is accompanied by
rising volume and a strong volume accumulation. Since volume is the
fuel that powers rallies, it follows that lagging volume on rallies
is a sign of less fuel available to move stocks higher.
Conversely, declines are usually accompanied by low volume, but end
with panic-like liquidation on the part of institutional investors.
Thus, we look for a pickup in volume and then lower lows on reduced
volume with some accumulation before a valid bottom can develop.
The third premise is that by using the Chaikin Oscillator, you can
monitor the flow of volume into and out of the market. Comparing
this flow to price action can help identify tops and bottoms, both
short-term and intermediate-term.
Since no technical approach works all the time, I suggest using the
oscillator along with other technical indicators to avoid problems.
I favor using a price envelope
around a 21-day moving average and an overbought/oversold oscillator
together with the Chaikin Oscillator for the best short and
intermediate-term technical signals.
- The most important signal generated by the Chaikin Oscillator
occurs when prices reach a new high or new low for a swing,
particularly at an overbought or oversold level, and the
oscillator fails to exceed its previous extreme reading and then
reverses direction. Signals in the direction of the
intermediate-term trend are more reliable than those against the
trend. A confirmed high or low does not imply any further price
action in that direction. I view that as a non-event.
- A second way to use the Chaikin Oscillator is to view a change
of direction in the oscillator as a buy or sell signal, but only
in the direction of the trend. For example, if we say that a stock
that is above its 90-day moving average of price is in an
up-trend, then an upturn of the oscillator while in negative
territory would constitute a buy signal only if the stock were
above its 90-day moving average - not below it.
A downturn of the oscillator while in positive territory (above
zero) would be a sell signal if the stock were below its 90-day
moving average of closing prices.
Tips
Advanced users can perform variations on the Chaikin
Oscillator by changing the "3" and "10" in the following formula:
mov( ad(), 3, E) - mov( ad(), 10, E)
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