Description and methodology

The Chaikin Oscillator was developed by Marc Chaikin. His aim was to further develop the Ultimate Oscillator. The indicator helps to observe the inward and outward trading volume on the market. It measures the difference of the ACC/DIST line in two different periods. Chaikin believes that the trading volume must be observed to get a realistic image of the share’s inner dynamism during the technical analysis. The observation of the volume can show what changes make the price increase or decrease. In general, the price and the volume move together. When they move separately, the trend of the price is going to change. The indicator used the ACC/DIST lines and it is also called Chaikin ACC/DIST Oscillator. ACC/DIST can measure the sell and buy pressure from the relationship of high and low values and the following closing price. There is a pressure on the buyer side when the share price closes in the upper range in a given period. There is a pressure on the seller side when the share price closes in the lower range. ACC/DIST is calculated by multiplying the Closing Location Value (CLV) with the trading volume for each period.

The indicator calculates the difference of two moving averages (using different prices than the closing price):

[latex]ChaikinOscillator=EMAve(3,Acc/DistLine)-EMAve(10,Acc/DistLine)[/latex]

Therefore, the oscillator is the difference of the 3-period and 10-period EMA of the ACC/DIST lines.

Difference of 3- and 10-period EMAs of the ACC/DIST lines and divergences

Chaikin Oscillator is similar to the MACD indicator, but involves the ACC/DIST lines. The index is the difference of the 3-period and 10-period EMA of the ACC/DIST lines. The oscillator signals the crosses of the ACC/DIST lines like the MACD signals the crosses of the MAs. The signals are the same as it was for the MACD indicator. However, the signals are valid for the ACC/DIST lines and not for the share.

Trading signals

Long signal. There are two types of long signals on the Chaikin Oscillator:

• positive divergence
• midline crosses.

The Chaikin Oscillator is an indicator of an indicator, so the signals must be confirmed by other indicators before opening a long position.

Positive divergence and trading signals on the Chaikin Oscillator

Short signal. There are two types of short signals on the Chaikin Oscillator:

• negative divergence
• midline crosses.

The Chaikin Oscillator is an indicator of an indicator, so the signals must be confirmed by other indicators before opening a short position.

A decrease in the share price’s fluctuation is signalled by a widening gap between the share price and the Chaikin Oscillator. It does not show trend reversals, only the weakening of trends. When the share’s peaks are increasing but the Oscillator is decreasing, the ascending trend’s weakening is expected (bearish divergence). When the share’s peaks are decreasing but the Oscillator is increasing, the inclining trend’s weakening is expected (bullish divergence).

Negative divergence and trading signals on the Chaikin Oscillator

Use

Chaikin Oscillator can give momentum to the ACC/DIST lines. However, the results are sometimes difficult to interpret. The MAs are short, making the indicator sensitive to movements in the ACC/DIST. Sensitivity is important, but the indicator should remain interpretable. The indicator should be used together with other indicators. Chaikin Oscillator is an excellent tool to observe volume entering and leaving the market.  Accumulation (buyer pressure) is when the closing price of the period is higher than the average of the minimum and maximum price. Distribution (seller pressure) is when the closing price of the period is lower than the average of the minimum and maximum price. The indicator signals bullish and bearish divergences. A decrease in the share price’s fluctuation is signalled by a widening gap between the share price and the Chaikin Oscillator. When prices are increasing and the Chaikin Oscillator is decreasing (bearish divergence), the ascending trend is weakening. When prices are decreasing and the Chaikin Oscillator is increasing (bullish divergence), the inclining trend is weakening. The Chaikin Oscillator can only indicate the trend’s weakening but not a change in the trend’s direction. A direction change should be confirmed by other signals.

Examples

The chart below illustrates the Chaikin Oscillator on the Eastman Kodak share.

Chaikin Oscillator on the Eastman Kodak share