Trend-Spotting with the Accumulation/Distribution Line

The collection/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 prepayment/decline line. While their initials might be the same, these are entirely different indicators, as are their purchasers. The advance/decline line provides insight into market movements and the accumulation/distribution line is of use to traders pursuing to measure buy/sell pressure on a security or confirm the strength of a trend.  

The first step in producing 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 trade mark Aga for a given period (one day, week or month). The CLV will have a value from +1 to -1:

• A value of zero would promise that the price closed halfway between the high and low of the range.
• A value of +1 means the close is equal to the exorbitant 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=H−L(C−L)−(H−C)​where:C=closing priceH=high of the price rangeL=low of the price range​

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

• Monitor General Money Overspread – The A/D line can be used as a gauge for the general flow of money. An A/D line’s move higher is a signal that buying press is starting to prevail. On the flip side, an A/D line’s downward move signals increased selling pressure is beginning to revenue 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 hindrances to keep in mind when analyzing a security using the A/D line:

• Trading Gaps – The A/D line does not take interchange 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 assay has gapped upward but closes around the midpoint, that gap will be ignored because the A/D line is formulated using attached prices. 
• 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 command be difficult (if not impossible) to detect until the A/D line turned upward. 

Bullish Signals

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

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

Source: StockCharts.com

Bearish Signals

A bearish signal is built when the A/D line trends downward, but the price of the security is in an uptrend (see Figure 2). Selling pressure is beginning to further, usually signaling a future downtrend in the price.

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

Source: StockCharts.com

Spotting a Divergence

In order to spot bearish or bullish signals, a trend must be detectable in the underlying custody. Once this has been established, begin looking for a divergence from that trend. When spotting these divergences, either bullish or bearish, it is conquer to allow a week or two for the signals to develop. In the case of bearish patterns, keep an eye out for flat signals or those lacking a swanky divergence – these can also signal that no future change is probable. 

Other indicators can be old along with the A/D line:

Money Flow Index

The money flow index (MFI) is a volume-weighted momentum indicator fitted using a 14-day period. This indicator compares positive money flow to negative money flow, creating an with which can then be compared to the price of the security to identify current strength or weakness of a trend. 

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

• A security close to 100 usually signals an overbought position. In reality, an overbought position can be signaled by an MFI value about 80.
• A security near zero will signal an oversold position. A value of around 20 usually qualifies a outlook as oversold. 

Relative Strength Index

Another indicator which can be used with the A/D line is the relative strength indicator (RSI), a momentum oscillator. RSI is calculated by taking the magnitude of a stock’s recent gains and comparing it to the magnitude of a stock’s recent set-backs. RSI has a number range from 0-100. Like MFI, it is used primarily to highlight overbought and oversold conditions. RSI is best tolerant of as a complement to another technical tool to analyze a security. 

Combining Indicators and Oscillators

While using the A/D line by itself is not to say feasible, it is even more advantageous to add either MFI, RSI, or both. Since MFI and RSI both provide ranges, they can be used to searchlight extreme conditions the A/D line was not designed to spotlight.

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

• MFI measures the flow of money into a security, whether that money is positive or negative.
• RSI be in a classes the magnitude of a stock’s recent gains to its recent losses.

Neither of these technical tools overlaps, so they can really be used in conjunction with the A/D line.

The following is a three-month chart of Kellogg Co. (NYSE: 

Conclusion