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Chaikin Oscillator

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The Chaikin Oscillator 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 series 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 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. Those with the software and resources may try changing the moving averages on the indicator(an option available in our SharpCharts 'Indicator Windows') to further smooth the fluctuations. This indicator should definitely be used in conjunction with other aspects of technical analysis.

Chaikin Money Flow is one answer to the volatility that has been created from the Chaikin Oscillator.

Bullish Signals

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.

Bearish Signals

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 bearish signal is rendered.

Computation

volume x [(close-low)- (high-close)] / (high - low).

The figure is calculated daily and then a running total is kept. The oscillator is created by comparing the three-day moving average to the ten-day moving average.


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