Accumulation Distribution

What

A momentum indicator that attempts to gauge supply and demand by determining whether investors are generally "accumulating" (buying) or "distributing" (selling) a certain security by identifying divergences between security price and volume flow.

How

Accumulation/Distribution index is a cumulative total volume technical analysis indicator created by Marc Chaikin, which adds or subtracts each day's volume in proportion to where the close is between the day's high and low.

First a close location value is formed,

                (close – low) – (high – close)

CLV =    ___________________________

                           High - low

This ranges from -1 when the close is the low of the day, to +1 when it's the high. For instance if the close is 3/4 the way up the range then CLV is +0.5. The accumulation/distribution index adds up volume multiplied by the CLV factor, ie.

Acc/dist = acc/dist prev + volume x CLV

The starting point for the acc/dist total, ie. the zero point, is arbitrary, only the shape of the resulting indicator is used, not the actual level of the total.

When

• Bullish Signals

A bullish signal is given when the Accumulation/Distribution Line forms a positive divergence. Be wary of weak positive divergences that fail to make higher reaction highs or those that are relatively young. The main issue is to identify the general trend of the Accumulation/Distribution Line. A two-week positive divergence may be a bit suspect. However, a multi-month positive divergence deserves serious attention.

• Bearish Signals

The same principles that apply to positive divergences apply to negative divergences. The key issue is to identify the main trend in the Accumulation/Distribution Line and compare it to the underlying security. Young negative divergences, or those that are relatively flat, should be looked upon with a healthy dose of skepticism.