Volume Accumulation
Oscillator
(Chaikin Oscillator)
Volume analysis
is important for identifying internal strengths
and weaknesses in a market. Very often, a
divergence between volume and price movements
can offer clues to an impending reversal.
Overview
The
Volume Accumulation Oscillator (VAO) -- also
called the Chaikin Oscillator after its designer
Marc Chaikin -- is more sensitive to volume
versus price than the On Balance Volume indicator.
VAO assigns
a proportional amount of volume to the price
according to the relationship between the closing
price and the average price for the day.
- A close above
the mean price is given a positive value
and a close below the mean a negative value.
- When the market
closes at either the high or low of the
day, the volume is given full value.
In general,
volume oscillators are designed based on the
following premises:
- Volume and
price normally rise and fall together,
and when this relationship changes it can
provide an early indication of a coming
change in trend.
- The more a
market is controlled by buyers (accumulation),
the closer it will close to its high. If
a market is controlled by sellers
(distribution), it will close below its
midpoint for the day.
- Lagging volume
on an upward move is often a forewarning
of a weakening market. A declining market
is more complex; usually there's a pickup
in volume followed by reduced volume and
a period of accumulation before a valid
bottom develops.
Interpretation
Divergence
between volume and price movement is often the
sign that a reversal is about to take place.
In the short and intermediate term, the VAO
helps to identify market tops and bottoms
by sensitively comparing volume to price action.
Most indicators
are most effective when used in conjunction
with other, complimentary indicators. An effective
short and intermediate-term combination of indicators,
for example, might include VAO, along with a
21-day moving average and an overbought/oversold
oscillator (e.g., Momentum, ROC, CCI).
The VAO
is most valuable when:
- in an overbought/sold
position, prices reach a new high or low
and the oscillator fails to exceed its previous
high/low reading and then reverses direction.
Signals
Buy
or sell signals are considered reliable only
when they are in keeping with the overall (long-term)
trend.
- A buy signal
would be generated if an up-trending market
is above its intermediate (100-day) moving
average, and a negative VAO turns upwards
(from a trough).
- A sell signal
would generated if a stock is below its
100-day moving average and a positive VAO
turns downwards (from a peak).
Further
Details
The default
VAO 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.
Further
Information
