Inspired by the prior work of Joe Granville and Larry Williams, Marc Chaikin developed a new volume indicator, extending the work done by his predecessors. The Chaikin Oscillator is a moving average oscillator based on the Accumulation/Distribution indicator.

Interpretation

The following discussion of volume accumulation/distribution interpretation, written by Marc Chaikin, is reprinted here with his permission:

Technical analysis of both market averages and individual stocks must include volume studies in order to give the technician a true picture of the internal dynamics of a given market. Volume analysis helps in identifying internal strengths and weaknesses that exist under the cover of price action. Very often, volume divergences versus price movement are the only clues to an important reversal that is about to take place. While volume has always been mentioned by technicians as important, little effective volume work was done until Joe Granville and Larry Williams began to look at volume versus price in the late 1960s in a more creative way.

For many years it had been accepted that volume and price normally rose and fell together, but when this relationship changed, the price action should be examined for a possible change of trend. The Granville OBV concept which views the total volume on an up day as accumulation and the total volume on a down day as distribution is a decentone, but much too simplistic to be of value. The reason is that there are too many important tops and bottoms, both short-term and intermediate-term, where OBV confirms the price extreme. However, when an OBV line gives a divergence signal versus a price extreme, it can be a valuable technical signal and usually triggers a reversal in price.

Larry Williams took the OBV concept and improved on it. In order to determine whether there was accumulation or distribution in the market or an individual stock on a given day, Granville compared the closing price to the previous close, whereas Williams compared the closing price to the opening price. He [Williams] created a cumulative line by adding a percentage of total volume to the line if the close was higher than the opening and, subtracting a percentage of the total volume if the close was lower than its opening price. The accumulation/distribution line improved results dramatically over the classic OBV approach to volume divergences.

Williams then took this one step further in analyzing the Dow Jones Industrials by creating an oscillator of the accumulation/distribution line for even better buy and sell signals. In the early 1970s, however, the opening price for stocks was eliminated from the daily newspaper and Williams’ formula became difficult to compute without many daily calls to a stockbroker with a quote machine. Because of this void, I created the Chaikin Oscillator substituting the average price of the day for Williams’ opening and took the approach one step further by applying the oscillator to stocks and commodities. The Chaikin Oscillator is an excellent tool for generating buy and sell signals when its action is compared to price movement. I believe it is a significant improvement over the work that preceded it.

The premise behind my oscillator is three-fold. The first premise is that if a stock or market average closes above its midpoint for the day (as defined by [high + low] / 2), then there was accumulation on that day. The closer a stock or average closes to its high, the more accumulation there was. Conversely, if a stock closes below its midpoint for the day, there was distribution on that day. The closer a stock closes to its low, the more distribution there was.

The second premise is that a healthy advance is accompanied by rising volume and a strong volume accumulation. Since volume is the fuel that powers rallies, it follows that lagging volume on rallies is a sign of less fuel available to move stocks higher.
Conversely, declines are usually accompanied by low volume, but end with panic-like liquidation on the part of institutional investors. Thus, we look for a pickup in volume and then lower-lows on reduced volume with some accumulation before a valid bottom can develop.

The third premise is that by using the Chaikin Oscillator, you can monitor the flow of volume into and out of the market. Comparing this flow to price action can help identify tops and bottoms, both short-term and intermediate-term.
Since no technical approach works all the time, I suggest using the oscillator along with other technical indicators to avoid problems. I favor using a price envelope around a 21-day moving average and an overbought/oversold oscillator together with the Chaikin Oscillator for the best short and intermediate-term technical signals.

The most important signal generated by the Chaikin Oscillator occurs when prices reach a new high or new low for a swing, particularly at an overbought or oversold level, and the oscillator fails to exceed its previous extreme reading and then reverses direction.

1. Signals in the direction of the intermediate-term trend are more reliable than those against the trend.
2. A confirmed high or low does not imply any further price action in that direction. I view that as a non-event.

A second way to use the Chaikin Oscillator is to view a change of direction in the oscillator as a buy or sell signal, but only in the direction of the trend. For example, if we say that a stock that is above its 90-day moving average of price is in an uptrend, then an upturn of the oscillator while in negative territory would constitute a buy signal only if the stock were above its 90-day moving average–not below it.

A downturn of the oscillator while in positive territory (above zero) would be a sell signal if the stock were below its 90-day moving average of closing prices.

Example

The following chart shows Eastman Kodak and the Chaikin Oscillator. Bearish divergences (where prices increased to new highs while the Oscillator was falling) occurred at points “A” and “B.” These divergences were warnings of the sell-offs that followed.

Calculation

The Chaikin Oscillator is created by subtracting a 10-period exponential moving average of the Accumulation/Distribution Line from a 3-period exponential moving average of the Accumulation/Distribution Line.

By. Steven B. Achelis

CANSLIM is an acronym for a stock market investment method developed by William O’Neil. O’Neil is the founder and chairman of Investor’s Business Daily, a national business newspaper. He also heads an investment research organization, William O’Neil & Company, Inc.

Drawing from his study of the greatest money-making stocks from 1953 to 1985, O’Neil developed a set of common characteristics that each of these stocks possessed. The key characteristics to focus on are captured in the acronym CANSLIM.

C = Current quarterly earnings per share
A = Annual earnings growth
N = New products, New Management, New Highs
S = Shares outstanding
L = Leading industry
I = Lnstitutional sponsorship
M = Market direction

Although not strictly a technical analysis tool, the CANSLIM approach combines worthy technical and fundamental concepts. The CANSLIM approach is covered in detail in O’Neil’s book, How To Make Money In Stocks.

Interpretation

The following text summarizes each of the seven components of the CANSLIM method.

Current Quarterly Earnings

Earnings per share (“EPS”) for the most recent quarter should be up at least 20% when compared to the same quarter for the previous year (e.g., first quarter of 1993 to the first quarter of 1994).

Annual Earnings Growth

Earnings per share over the last five years should be increasing at the rate of at least 15% per year. Preferably, the EPS should increase each year. However, a single year set-back is acceptable if the EPS quickly recovers and moves back into new high territory.

New Products, New Management, New Highs

A dramatic increase in a stock’s price typically coincides with something “new.” This could be a new product or service, a new CEO, a new technology, or even new high stock prices.

One of O’Neil’s most surprising conclusions from his research is contrary to what many investors feel to be prudent. Instead of adhering to the old stock market maxim, “buy low and sell high,” O’Neil would say, “buy high and sell higher.” O’Neil’s research concluded that the ideal time to purchase a stock is when it breaks into new high territory after going through a two to 15 month consolidation period. Some of the most dramatic increases follow such a breakout, due possibly to the lack of resistance (i.e., sellers).

Shares Outstanding

More than 95% of the stocks in O’Neil’s study of the greatest stock market winners had less than 25 million shares outstanding. Using the simple principles of supply and demand, restricting the shares outstanding forces the supply line to shift upward which results in higher prices.

A huge amount of buying (i.e., demand) is required to move a stock with 400 million shares outstanding. However, only a moderate amount of buying is required to propel a stock with only four to five million shares outstanding (particularly if a large amount is held by corporate insiders).

Leader

Although there is never a “satisfaction guaranteed” label attached to a stock, O’Neil found that you could significantly increase your chances of a profitable investment if you purchase a leading stock in a leading industry. He also found that winning stocks are usually outperforming the majority of stocks in the overall market as well.

Institutional Sponsorship

The biggest source of supply and demand comes from institutional buyers (e.g., mutual funds, banks, insurance companies, etc). A stock does not require a large number of institutional sponsors, but institutional sponsors certainly give the stock a vote of approval. As a rule of thumb, O’Neil looks for stocks that have at least 3 to 10 institutional sponsors with better-than-average performance records.

However, too much sponsorship can be harmful. Once a stock has become “institutionalized” it may be too late. If 70 to 80 percent of a stock’s outstanding shares are owned by institutions, the well may have run dry. The result of excessive institutional ownership can translate into excessive selling if bad news strikes.

O’Neil feels the ideal time to purchase a stock is when it has just become discovered by several quality institutional sponsors, but before it becomes so popular that it appears on every institution’s hot list.

Market Direction

This is the most important element in the formula. Even the best stocks can lose money if the general market goes into a slump. Approximately seventy-five percent of all stocks move with the general market. This means that you can pick stocks that meet all the other criteria perfectly, yet if you fail to determine the direction of the general market, your stocks will probably perform poorly.

Market indicators are designed to help you determine the conditions of the overall market. O’Neil says, “Learn to interpret a daily price and volume chart of the market averages. If you do, you can’t get too far off the track. You really won’t need much else unless you want to argue with the trend of the market.”

By. Steven B. Achelis

In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation.

Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices, they don’t involve any calculations.

Each candlestick represents one period (e.g., day) of data. Figure below displays the elements of a candle.

Interpretation

I have met investors who are attracted to candlestick charts by their mystique–maybe they are the “long forgotten Asian secret” to investment analysis. Other investors are turned-off by this mystique–they are only charts, right? Regardless of your feelings about the heritage of candlestick charting, I strongly encourage you to explore their use. Candlestick charts dramatically illustrate changes in the underlying supply/demand lines.

Because candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices. If you want to display a candlestick chart on a security that does not have opening prices, I suggest that you use the previous day’s closing prices in place of opening prices. This technique can create candlestick lines and patterns that are unusual, but valid.

The interpretation of candlestick charts is based primarily on patterns. The most popular patterns are explained below.

Bullish Patterns

Bearish Pattern

Reversal Patterns

Neutral Patterns

Example

The following chart of Corn illustrates several Japanese candlestick patterns and principles.

You can see that advancing prices are usually accompanied with empty lines (prices opened low and closed higher) and that declines are accompanied with filled-in lines (prices opened high and closed lower).

Bearish engulfing lines occurred at points “A” and “B” (and prices subsequently moved lower). Bullish white lines occurred at points “1,” “2,” and “3″ (as prices moved higher).

Each week a poll of investment advisors is taken and published by Investor’s Intelligence of New Rochelle, New York. Investment advisors are tracked as to whether they are bullish, bearish, or neutral on the stock market. The Bull/Bear Ratio shows the relationship between the bullish and bearish advisors.

Interpretation

The Bull/Bear Ratio is a market sentiment indicator. Dr. Martin Zweig sums up sentiment indicators in his book Winning On Wall Street by saying, “Beware of the crowd when the crowd is too one-sided.” Extreme optimism on the part of the public and even professionals almost always coincides with market tops. Extreme pessimism almost always coincides with market bottoms.

High readings of the Bull/Bear Ratio are bearish (there are too many bulls) and low readings are bullish (there are not enough bulls). In almost every case, extremely high or low readings have coincided with market tops or bottoms. Historically, readings above 60% have indicated extreme optimism (which is bearish for the market) and readings below 40% have indicated extreme pessimism (which is bullish for the market).

Example

The following chart shows the Bull/Bear Ratio and the S&P 500.

“Buy” arrows were drawn on the S&P 500 when the advisors were extremely bearish and “sell” arrows were drawn when advisors were extremely bullish.

Calculation

The Bull/Bear Ratio is calculated by dividing the number of bullish advisors by the number of bullish plus bearish advisors. The number of neutral advisors is ignored.

By Steven B. Achelis

The Breadth Thrust indicator is a market momentum indicator. It was developed by Dr. Martin Zweig. The Breadth Thrust is calculated by dividing a 10-day exponential moving average of the number of advancing issues, by the number of advancing plus declining issues.

Interpretation

A “Breadth Thrust” occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A “Thrust” indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought.

According to Dr. Zweig, there have only been fourteen Breadth Thrusts since 1945. The average gain following these fourteen Thrusts was 24.6% in an average time-frame of eleven months. Dr. Zweig also points out that most bull markets begin with a Breadth Thrust.

Example

The following chart shows the S&P 500 and the Breadth Thrust indicator.

Horizontal lines are drawn on the Breadth Thrust indicator at 40.0% and 61.5%. Remember that a Thrust occurs when the indicator moves from below 40% to above 61.5% during a 10 day period.

On December 18, 1984, I wrote the following comment regarding the Breadth Thrust indicator in a software manual:

“At the time this discussion on the Breadth Thrust is being written (12/18/84), the NYSE has gained only 1.6% since the ‘Thrust.’ If the market fails to go higher in the next six to twelve months, it will be the first false signal generated by the Breadth Thrust indicator in 39 years! With historical average gains of almost 25%, we feel the odds are in our favor when we go with the Thrust.”

As shown in the example, the NYSE did in fact go higher in the ensuing months. Twelve months after the Thrust occurred the NYSE was up 21.6%. Twenty-one months after the Thrust occurred, the NYSE was up a whopping 51%. Trust the next thrust…

Calculation

The Breadth Thrust is a 10-day simple  moving average of the following:

By Steven B. Achelis