Developed by Marc Chaikin back in the early 1970's when opening prices were eliminated from many newspaper listings making it more difficult to calculate William's OBV. Chaikin substituted the average price [(HIGH+LOW)/2] for William's opening price and created an oscillator using 10-period and 3-period exponential moving averages of the resulting Accumulation/Distribution Line.
The basic premise of the Accumulation/Distribution Line is that the degree of buying or selling pressure can be determined by the location of the close, relative to the high and low for the corresponding period. There is buying pressure when a stock closes in the upper half of a period's range and there is selling pressure when a stock closes in the lower half of the period's trading range.
Bullish Signals
There are two bullish signals that can be generated from the Chaikin Oscillator: positive divergences and centerline crossovers. Because the Chaikin Oscillator is an indicator of an indicator, it is prudent to look for confirmation of a positive divergence, by a bullish moving average crossover for example, before counting this as a bullish signal.
Bearish Signals
In direct contrast to the bullish signals, there are two bearish signals that can be generated from the Chaikin Oscillator: a negative divergence and a bearish centerline crossover. Allow a negative divergence to be confirmed by a bearish centerline crossover, before a bullish signal is rendered.
The Chaikin Oscillator is good for adding momentum to the Accumulation/Distribution Line, but can sometimes add a little too much momentum and be difficult to interpret. The moving averages are both relatively short and will therefore be more sensitive to changes in the Accumulation/Distribution Line. Sensitivity is important, but one must also be able to interpret the indicator.