Developed by Marc Chaikin
back in the early 1970's when opening prices were eliminated from many
newspaper listings making it more difficult to calculate William's OBV.
Chaikin substituted the average price [(HIGH+LOW)/2] for William's opening
price and created an oscillator using 10-period and 3-period exponential
moving averages of the resulting Accumulation/Distribution Line.
The basic premise of the
Accumulation/Distribution Line is that the degree of buying or selling
pressure can be determined by the location of the close, relative to the
high and low for the corresponding period. There is buying pressure when a
stock closes in the upper half of a period's range and there is selling
pressure when a stock closes in the lower half of the period's trading
There are two bullish
signals that can be generated from the Chaikin Oscillator: positive
divergences and centerline crossovers. Because the Chaikin Oscillator is
an indicator of an indicator, it is prudent to look for confirmation of a
positive divergence, by a bullish moving average crossover for example,
before counting this as a bullish signal.
In direct contrast to the
bullish signals, there are two bearish signals that can be generated from
the Chaikin Oscillator: a negative divergence and a bearish centerline
crossover. Allow a negative divergence to be confirmed by a bearish
centerline crossover, before a bullish signal is rendered.
The Chaikin Oscillator is
good for adding momentum to the Accumulation/Distribution Line, but can
sometimes add a little too much momentum and be difficult to interpret.
The moving averages are both relatively short and will therefore be more
sensitive to changes in the Accumulation/Distribution Line. Sensitivity is
important, but one must also be able to interpret the indicator.