The accumulation/distribution line was created by Marc Chaikin to determine the flow of money into or out of a security. It should not be confused with the advance/decline line. While their initials might be the same, these are entirely different indicators, and their uses are different as well. Whereas the advance/decline line can provide insight into market movements, the accumulation/distribution line is of use to traders looking to measure buy/sell pressure on a security or confirm the strength of a trend. Read on to learn how to use accumulation/distribution to analyze a security. (Read more about Marc Chaikin in Discovering Keltner Channels And The Chaikin Oscillator.)

Close Location Value

The first step in creating the accumulation/distribution (A/D) line is finding the close location value (CLV), which looks at the location of the close and compares it to the range for a given period (one day, week or month). The CLV will have a value from +1 to -1:

  • A value of zero would mean that the price closed halfway between the high and low of the range.
  • A value of +1 means the close is equal to the high of the range.
  • A value of -1 means the close is equal to the low of the range.

The CLV can be calculated as follows:

CLV = ([(C-L) - (H - C)] / (H - L))

Where:

C = the closing price
H = the high of the price range
L = the low of the price range

The CLV is then multiplied by the corresponding period's volume, and the total will form the A/D line. (For a look at the CLV's precursor, the on-balance volume, read Introduction To On-Balance Volume.)

Benefits and Drawbacks of Using the A/D Line

In some instances, using the A/D line can give traders a clear advantage:

  • Monitor General Money Flow - The A/D line can be used as a gauge for the general flow of money. If the A/D line is moving higher, this signals that there is buying pressure that is starting to prevail. On the flip side, if the A/D line is moving downward, this signals that increased selling pressure is beginning to gain a foothold.
  • Confirmation - You can also use the A/D line to confirm the strength, and possibly the longevity, of a current move.

There are also a few drawbacks to keep in mind when analyzing a security using the A/D line:

  • Trading Gaps - The A/D line does not take trading gaps into consideration, so these gaps, when they occur, may not be factored into the A/D line at all. Therefore, if a stock's price has gapped upward but closes around the midpoint, that gap will be ignored because the A/D line is formulated using closing prices. (To learn about profiting from trading gaps, read Playing The Gap.)
  • Minor Changes - Sometimes it can be difficult to detect minor changes in volume flows. The rate of change in a downtrend could be slowing, but this would be difficult (if not impossible) to detect until the A/D line turned upward. (To learn how to monitor trends in volume, read Volume Rate Of Change.)

Bullish and Bearish Signals

The A/D line creates both bullish and bearish signals. These signals rely on divergence and confirmation.

Bullish Signals
Bullish signals occur when the price of a security is moving down or is in a downtrend, but A/D line is trending upward (see Figure 1). This divergence signals increased buying pressure, which can indicate weakening seller strength. It is usually followed by a change in the trend of the security from downward to upward.

Figure 1: A chart of Goldman Sachs (NYSE:GS) clearly shows that the current A/D line has moved positively while the stock continues to be in a downward trend.
Source: StockCharts.com

Bearish Signals
A bearish signal is formed when the A/D line is trending downward, but the price of the security is in an uptrend (see Figure 2). Selling pressure is beginning to increase, which usually signals a future downtrend in the price.

Figure 2: A chart of AT&T (NYSE:ATT) shows the A/D line moving downward while the stock price continues its uptrend. While the divergence is early, what you are looking for is a separation between the price and the A/D line.
Source: StockCharts.com

Spotting a Divergence
In order to spot bearish and bullish signals, you need to have a trend in the underlying security. Once this has been established, you can begin to look for a divergence from that trend. When spotting these divergences, either bullish or bearish, it is best to allow a week or two for the signals to develop. When it comes to bearish patterns, you want to keep an eye out for signals that are flat or do not have a sharp divergence – these can also signal that no future change is probable. (For more information, see Divergence: The Trade Most Profitable.)

Other Indicators

There are other indicators that can be used along with the A/D line.

Money Flow Index
The money flow index (MFI) is a volume-weighted momentum indicator. This indicator compares positive money flow to negative money flow and creates an indicator that can then be compared to the price of the security to identify the current strength or weakness of a trend. It is calculated using a 14-day period.

The MFI has a scale from 0-100. This scale is a range:

  • A security that is close to 100 usually signals an overbought position. In reality, an overbought position can be signaled by an MFI value around 80.
  • A security that is near zero will signal an oversold position. A value of around 20 usually qualifies a position as oversold. (For further reading, see The Basics Of Money Flow.)

Relative Strength Index
Another indicator that can be used with the A/D line is the relative strength index (RSI), a momentum oscillator. The RSI is calculated by taking the magnitude of a stock's recent gains and comparing it to the magnitude of a stock's recent losses. The RSI has a number range from 0-100. Like the MFI, it is used primarily to highlight overbought and oversold conditions. The RSI is best used as a complement to another technical tool to analyze a security. (To learn more, read Ride The RSI Roller coaster.)

Combining Indicators and Oscillators
While using the A/D line by itself is indeed feasible, it is even more advantageous to add either the MFI, the RSI, or both. Since the MFI and RSI both give a range, they can be used to spotlight extreme conditions that the A/D line was not designed to spotlight.

While the RSI and MFI both attempt to highlight overbought or oversold positions, they go about it in different ways:

  • The MFI measures the flow of money into a security, whether that money is positive or negative.
  • The RSI compares the magnitude of a stock's recent gains to its recent losses.

Neither of these technical tools overlaps, so they can indeed be used in conjunction with the A/D line. (For more information, see our Exploring Oscillators And Indicators tutorial.)

The A/D Line in Action

The following is a three-month chart of Kellogg Co. (NYSE:K). This is a perfect example of the A/D line showing us that the strength of the uptrend is indeed sound. As the trend continues upward, the A/D shows that this uptrend has longevity. Even after a minor drop in the stock price starting August 11, 2008, the A/D line continued to signal strength. The stock had then begun to turn around again.

Figure 3
Source: StockCharts.com

The next example is Pfizer Inc. (NYSE:PFE). This is a two-month chart, and the A/D line confirmed both the uptrend and the downtrend. At the right of the chart, the stock looks like it is beginning to follow the lead that the A/D line signaled early on in August 2008.

Figure 4
Source: StockCharts.com

The following is a two-month chart of Apple Inc. (Nasdaq:AAPL). The A/D line and stock price have gone hand in hand. Apple has been on a downtrend, and the A/D line has been confirming existing selling pressure on the stock, forcing it to go down. The A/D line is confirming a downtrend at the latest date on the chart.

Figure 5
Source: StockCharts.com

Conclusion

The accumulation/distribution line is an effective tool for spotlighting buying and selling pressure on a security. It is also a fantastic way to confirm an existing trend. Using the A/D line alone is one way to analyze a security, but it can also be used with either the MFI or the RSI to refine the analysis. Since both the RSI and MFI work well with the A/D line, using them together can help you get a better sense of overbought or oversold situations. In the end, the A/D line is an effective tool in any trader's arsenal.

Related Articles
  1. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  2. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  3. Technical Indicators

    Using Moving Averages To Trade The Volatility Index (VIX)

    VIX moving averages smooth out the natural choppiness of the indicator, letting traders and market timers access reliable sentiment and volatility data.
  4. Chart Advisor

    Traders Step Back to Assess Commodities Damage

    Traders are turning to these exchange-traded notes and exchange-traded funds to analyze key commodities and determine what could be coming next.
  5. Trading Strategies

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  6. Technical Indicators

    Detrended Price Oscillator Trading Strategies

    The detrended price oscillator (DPO) offers a simple approach to cycle analysis, removing momentum and long-term trends from the equation.
  7. Investing

    Using Fibonacci to Analyze Gold

    Use Fibonacci studies to analyze gold by picking out hidden harmonic levels that can provide major support or resistance.
  8. Investing

    Predictions For The Stock Market

    Learn different choices and strategies that can be used to create a profit regardless of what direction the market is going.
  9. Chart Advisor

    Real Estate Investment Trust ETFs Offer Stability

    Risk-averse traders are turning to real estate investment trusts. We'll look at a popular real estate investment trust ETF and few of its top holdings.
  10. Chart Advisor

    Four ETFs for Trading Falling Crude Oil

    Commodity traders are turning toward oil because the recent move below a key support level is signaling a move lower. We'll look at four ETFs you can use to gain exposure.
RELATED TERMS
  1. Indicator

    Indicators are statistics used to measure current conditions ...
  2. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  3. Mass Index

    A form of technical analysis that looks at the range between ...
  4. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  5. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  6. Negative Volume Index - NVI

    A technical indicator that relies on changes in a security’s ...
RELATED FAQS
  1. What are the most popular volume oscillators in technical analysis?

    The most popular volume oscillators in technical analysis are the Percentage Volume Oscillator, or PVO, and the Chaikin Oscillator. ... Read Full Answer >>
  2. What are the best technical indicators to complement the Zig Zag Indicator?

    The zig zag indicator is a technical indicator used by investors to predict when a security's momentum is experiencing a ... Read Full Answer >>
  3. Why is the Close Location Value (CLV) important for investors and traders?

    Though rarely used on its own, the close location value (CLV) is a way to measure the relative location of a security's price ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  6. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!