The accumulation/distribution (A/D) line is a popular money flow volume-measurement type indicator. This indicator was developed by a famous trader and analyst by the name of Marc Chaikin. It is essentially designed to provide insights into market movements by measuring the buying and selling pressures on security to access the strength and sustainability of the prevailing trend.
Like many money flow indicators, the AD line uses closing prices, highs and lows of the price range, and the corresponding period’s volume as a gauge for the general flow of money. An A/D line that is rising hints of increased buying pressure or accumulation. On the other hand, an A/D line that is declining signals increased selling pressure or distribution. A/D line can help to confirm the strength, duration, and magnitude of a current move.
A/D line creates bullish and bearish signals and is most effective when there are divergences and confirmations between the technical indicator and the price trend. No indicator is correct all the time, and not many are effective when using in isolation. Nonetheless, when A/D line is rising and there is an agreement between the A/D line and the price uptrend then it lends extra weight to the sustainability of the trend.
However, it is when there is no agreement or when there is a divergence between price and the indicator that this becomes an important technical signal. That is if price falls and the A/D indicator rises this is a positive divergence and signals an impending bullish price reversal. Conversely, when the price rises while the A/D indicator is declining, this is a negative divergence and warns of an impending price reverse to the downside.
In summary, the A/D line can be an effective tool when used in conjunction with other technical tools for detecting underlying supply and demand in the security or market. The indicator accomplishes this by identifying the changing volume and price movements to measure the internal accumulation (buying) or distribution (selling) in the security or market.
Enclosed below are key U.S. indexes including S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), NYSE Composite Index (NYA), and NASDAQ Composite Index (COMPQ) accompanied by their respective accumulation/distribution lines as well as another price/volume technical indicator – On Balance Volume (OBV).
OBV indicator, developed by Joe Granville, also uses volume flow to predict changes in the price trend. The major difference between these two indicators is based on the relative close. OBV compares the close with the prior close. A/D line compares the close with the high-low range. When volume increases sharply without significant change in the stock’s price, the price will typically move aggressively higher or fall dramatically lower.