Many of the indicators used in the technical analysis are lagging indicators. They basically identify trends that are starting or already in place. The positive thing about lagging indicators is that they send fewer false signals. But their downside is that their entry signals may be quite late to come.
But Oscillators, on the other hand, are leading indicators. Oscillators always oscillate between a two-point range. Although leading indicators can show a few inaccurate or false signals, they typically signal trend changes before they develop and help traders identify reversal spaces.
Chaikin A/D oscillator is one such leading indicator.
What is Chaikin A/D Oscillator?
In simple terms, Chaikin A/D Oscillator is an indicator of another indicator. It is formed by applying the Moving Average Convergence Divergence indicator (or MACD) to the Chaikin A/D Line (or ADL).
This means that Chaikin A/D Oscillator = (3 day EMA of ADL – 10 day EMA of ADL)
EMA = Exponential Moving Average
ADL = Chaikin A/D Line. The A/D line, or the Accumulation Distribution Line is a volume-based indicator which measures the cumulative flow of money into and out of a security. The indicator essentially shows if most stocks are participating in the direction of the market.
The Uses of Chaikin A/D Oscillator
Chaikin A/D Oscillator basically adds the element of momentum into ADL. So, it can be used for predicting the changes in ADL. Since momentum usually precedes any trend changes, Chaikin A/D Oscillator can be used for predicting bullish as well as bearish moves well in advance.
There are basically two types of bullish as well as bearish signals that are generated by Chaikin A/D Oscillator. They are divergences and crossovers (or crosses). Remember that these signals relate to the ADL and is not directly related to the stock itself. A brief explanation of both crosses, as well as divergences, are provided below.
Chaikin A/D Oscillator and Crosses
Whenever there is a centerline crossover at the zero line by Chaikin A/D Oscillator, it usually indicates an upcoming trend reversal.
Bearish Cross: Prices start to fall whenever the crossover happens from above the zero line to below the zero line. This is called a bearish cross.
Bullish Cross: Contrariwise, prices start to increase whenever the crossover happens from below the zero line to above the zero line. This is termed as a bullish cross.
In the chart below, you can see both bullish cross as well as bearish cross happening.
As soon as the bullish cross happened in the Chaikin A/D Oscillator, it moved from below zero line to above zero line. Soon after, the price started moving upwards.
Similarly, as soon as the bearish cross happened in the Chaikin A/D Oscillator, it moved from above zero line to below zero line. Soon after, the price started moving downwards.
Chaikin A/D Oscillator and Divergence
Whenever there is a conflict between the price and Chaikin A/D Oscillator, divergences occur. When prices fall, but the Chaikin A/D Oscillator rises, it is termed as bullish divergence. On the other hand, when prices rise while the Chaikin A/D Oscillator keeps falling, it is called as bearish divergence.
The figure below shows a bullish divergence. The Chaikin A/D Oscillator was making higher lows while the price was making lower lows. Quite soon, the price started moving upwards.