Accumulation/Distribution Stock Indices Technical Analysis and Accumulation/Distribution Stock Indices Signals

Developed by Marc Chaikin

This indices technical indicator is used to assess the cumulative flow of money into and out of a stock indices.

Originally used for stocks trading, when it comes to stocks trading "volume" is the amount of shares traded in a particular stock, this volume is a direct reflection of the money that is coming into and out of a stock.

The basic principle behind AD is that volume(or money flow) is a leading indicator of the stock index price. (Volume precedes indices price).

Tick volume is the measure of stock index price changes (ticks) received by a stock indices broker during a particular trading period/interval. The tick volume is incorporated by many stock index trading brokers in their charting software.

Interpretation

This volume indicator is used to determine if volume is increasing or decreasing as the stock index price on a stock indices chart is rising or falling.

Uptrend

If the stock index price on a stock indices chart is rising then the Accumulation/Distribution should also be rising. This shows that the stock index price move is being supported by volumes and the move upwards has strength and is sustainable.

If on the other hand stock index price is moving up and the volumes are not, the strength behind the move is reducing; this creates divergence between stock index price and indicator and warns of a possible move in the opposite direction.

Downtrend

If the stock index price on a stock indices chart is falling then the AD should also be falling. This shows that the stock index price move is being supported by volumes and the move downwards has strength behind it.

If on the other hand stock index price is moving down and the volumes are not, the strength behind the move is reducing; this creates divergence between stock index price and AD and warns of a possible move in the opposite direction.

Stock Indices Technical Analysis and Generating Stock Indices Signals

Below is an example of a stock indices chart and the technical analysis explanation

From the chart above we can separate the chart into three parts, part A, B and C.

A - Upward stock indices trend line on chart as well as on the Accumulation/Distribution

B - Downward stock indices trend line on chart as well as on the Accumulation/Distribution

C - Upward stock indices trend line on chart as well as on the Accumulation/Distribution

As long as the stock index price and the indicator are moving in the same direction then the stock index price move has enough momentum to continue moving in that direction as shown above

Stock Indices Trend Line Break

From the above chart we can see that once the stock indices trend line on the AD was broken then the stock index price stock indices trend line was also broken.

Looking at the chart below we have added vertical lines to represent the points where the stock indices trend lines were broken, both on the stock index price chart and the indicator.

Comparing the stock indices trend lines on the indicator and the stock index price those of the AD were broken before those of the chart. This is because volume always precedes stock index price.

Trading signals

Exit

Exit signals are generated when the stock indices trend line on the Accumulation/Distribution is broken. A stock indices trend line break on the indicator warns of a possible reversal.

Entry

Once the stock indices trend line on the AD is broken it warns of a possible reversal in the direction of the stock index market.

However if we want to take a trade in the opposite direction it is always best to wait for a confirmation signal.

A confirmation signal is considered complete once both the indicator and the stock index price breaks both their stock indices trend lines.

Entry Signal Generated by Stock Indices Trend Reversal