Technical Analysis, Studies, Indicators : Accumulation/ Distribution Line

You may find the number of indicators in technical analysis to measure volume and the flow of money for an index or a particular security. The Accumulation/ Distribution Line is one of the mostpopular technical indicators to analyze volume. One of the technical analysis statements that "volume precedes price" implies that in many cases after decline and just before the reversal we may see increase in the volume (volume surge). Majority of the money flow (volume) indicators are developed to identify these volume surges in order to predict price trend reversals.


The Accumulation/ Distribution Line was developed by Marc Chaikin to measure the cumulative flow of money into and out of an index or security. The Accumulation/ Distribution Line could be compared to the OBV (On Balance Volume) which adds or subtracts volume depending on the close price. Marc Chaikin chooses different approach and instead of relying on the close price he used CLV (Close Location Value) that is calculated by the following formula:

CLV = (Close - Low) - (High -Close)
------------ --------- --------- --------- --------- --------- -
(High - Low)


or


CLV = 2 * Close - Low - High
------------ --------- --------- --------- --------- --------- -
High - Low


Basically the CLV formula defines where the close is in relation to the high and low:

If close = High (the bar close price is at the bar's high) then CLV = 1. The CLV = 1 reveals that the price advanced and it is at it's highest point;


If close = Low (the bar close price is at the bar's high) then CLV = -1 which reveals that the price declined and it is at it's lowest point;


When CLV = o , it tells us that we had price decline and price advance within the analyzed period, yet, at the end the price stuck in the middle: close = Low + (High - Low) / 2 or close = High - (High - Low) / 2;

The positive CLV shows that the price is closer to its High;

The negative CLV shows that the price is closer to its Low.

After defining CLV its value is multiplied by volume in the analyzed period and the cumulative total forms the Accumulation/ Distribution Line. Opposite to the OBV the Accumulation/ Distribution Line is considered more accurate.


For instance: the OBV will consider volume as positive money flow when price opens with swing up and then declines during the whole analyzed period, yet closes above the previous period close (thebar is up in relation to the previous bar close, yet it declined during the whole period). Because of the price decline during the analyzed period the Accumulation/ Distribution line in this example will consider volume as negative money flow. This situation could be very often seen on intraday charts at the market open.


The OBV is still a very accurate indicator on the daily chart, yet, on the intraday level the Accumulation/ Distribution line is considered as more precisely reflecting in and out money flow.The Accumulation/ Distribution Line could be used in similar to the OBV way: as confirmation indicator and to predict trend reversal.

If the Accumulation/ Distribution Line moves up and the price MA (Moving Average) rising then technical analysis tells that this indicator confirms the up-trend. When Accumulation/ Distribution Line declines during the price slide it confirms a down-trend. The divergence of the Accumulation/ Distribution Line movement and price trend could be used to anticipate possible changes in the market trend.

The declining Accumulation/ Distribution Line during the price advance may indicate possible developing of a new down-trend, while advancing Accumulation/ Distribution Line during the price decline could indicate a possibility of begging a new up-trend.Chart 1: S&P 500 index - Accumulation/ Distribution Line The same as with other volume based indicators the Accumulation/ Distribution Line provides best results when it is applied to analyze indexes (Nasdaq 100, S&P 500, DJI, NYSE and other).


The index analysis could be used to trade index derivatives, such as QQQQ, DIA and SPY, options on indexes, index e-mini futures, options on index derivatives as well as it could be used to trade stocks from the index basket that move along with their index.