Stock Diamond - Technical Analysis Education

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:

1. 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.
2. 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.
3. 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 and 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

Also see the On-Balance Volume, Price and Volume Trend (PVT) and Williams' Accumulation/Distribution indicators.