The Chaikin Oscillator or Volume Accumulation Oscillator consists of the difference between two exponential moving averages (usually 3 and 10-day) of the Accumulation Distribution Line indicator and might be used to confirm price movement or divergences in price movement. The Chaikin Oscillator is considered to be more accurate than the On Balance Volume indicator (see: On Balance Volume).
- On Balance Volume: adds all volume for the day if the close is positive, even if the stock closed only a penny higher; or subtracts all volume for the day if the stock closes lower.
- Chaikin Oscillator: factors in the closing price in relation to the highs, lows, and average price and determines the appropriate ratio of volume to be attributed to the day.
The main purpose of the Chaikin Oscillator is to attempt to confirm price trends and attempt to warn of impending price reversals. The chart below of the Nasdaq 100 ETF QQQQ illustrates these confirmation signals and divergence signals:
High #1 to High #2
The Nasdaq 100 ETF QQQQ made higher highs, usually interpreted as a bullish sign. However, the Chaikin Oscillator failed to mirror the QQQQ’s advance higher and ended up making a lower low. This bearish divergence forewarned of the impending price reversal.
High #2 to High #3
The QQQQ’s made a significantly lower high. The Chaikin Oscillator confirmed the QQQQ’s downtrend by making a lower high as well.
Low #1 to Low #2
The Nasdaq 100 made significant lower lows, yet the Chaikin Oscillator made higher lows. This bullish divergence signaled that the previous downtrend may have ended.
The Chaikin Oscillator is a volume based technical indicator that attempts to confirm the current price action or foreshadow future price reversals. Other technical indicators similar to the Chaikin Oscillator are the On Balance Volume indicator (see: On Balance Volume) and the Money Flow Index (see: Money Flow Index).
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