Thursday, October 14, 2010

Chaikin Oscillator

The Accumulation/Distribution Line was covered in a previous article; here, we will examine an indicator that stems from the concept behind the Accumulation/Distribution Line: the Chaikin Oscillator – or Chaikin A/D Oscillator, as it is sometimes called – named after its creator, Marc Chaikin. Before reading this article, you may want to become familiar with the concepts behind the 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 range.
The Chaikin Oscillator is simply the Moving Average Convergence Divergence indicator (MACD) applied to the Accumulation/Distribution Line. The formula is the difference between the 3-day exponential moving average and the 10-day exponential moving average of the Accumulation/Distribution Line. Just as the MACD-Histogram is an indicator to predict moving average crossovers in MACD, the Chaikin Oscillator is an indicator to predict changes in the Accumulation/Distribution Line.
Many of the same signals that apply to MACD are also applicable to the Chaikin Oscillator. Keep in mind though, that these signals relate to the Accumulation/Distribution Line, not directly to the stock itself. Readers may want to refer to our MACD article for more detailed information on various signals such as positive divergences, negative divergences and centerline crossovers.
Just as MACD injects momentum characteristics into moving averages, the Chaikin Oscillator gives momentum characteristics to the Accumulation/Distribution Line, which can be a bit of a laggard sometimes. By adding momentum features, the Chaikin Oscillator will lead the Accumulation/Distribution Line. The CIENA chart (CIEN) confirms that movements in the Accumulation/Distribution Line are usually preceded by corresponding divergences in the Chaikin Oscillator.
1.The July negative divergence in the Chaikin Oscillator foreshadowed the impending weakness in the Accumulation/Distribution Line. This was a slant-type divergence that is characterized by its lack of distinctive peaks to form the divergence. The Chaikin Oscillator peaked about a week before the Accumulation/Distribution Line, and formed a bearish centerline crossover 2 weeks later. When the oscillator is negative, it implies that momentum for the Accumulation/Distribution Line is negative or bearish, which would ultimately be a negative reflection on the stock.
2.The August positive divergence in the Chaikin Oscillator foreshadowed a sharp advance in the Accumulation/Distribution Line. This divergence was longer and could have been referred to as a trough divergence. In a trough divergence, there are two noticeable troughs, one higher than the other, that form the divergence. The bullish, or positive, momentum was confirmed when the Chaikin Oscillator formed a bullish centerline crossover in late August.