USING THE CHAIKEN A_D OSCILLATOR By DARYL GUPPY

This is a market about momentum. – finding it and setting stops. We have been looking at momentum stocks and exploring the relationship between volume and price activity. The key observation with these stocks is that price increases dramatically on high volume and that the price retreats are accompanies by much lower volume. The change in this mirror activity where a fall in price is matched by higher volume suggests a weakness in the trend. This relationship between price and volume can also be explored with a Chaiken Oscillator. This oscillator is built around three assumptions.

• The first is that if a stock closes above its median value for the day, then the stock is being accumulated. The closer the stock closes to its high for the day, the more accumulation takes place. Accumulation means, that buyers are confident that the price is likely to continue to increase.

• The second assumption, is that a healthy rise in price is not only matched with a rise in volume but that that volume also shows accumulation taking place. When volume lags behind price rallies, it shows that less buying power is available to move the stock price higher. This makes for a weaker trend.

• The third basis for the Chaiken Oscillator, is that you can monitor the flow of volume into and out of the market on a comparative basis. Essentially this is done by using two moving averages, 3 day and 10 day, comparing volume changes with changes in the advance or decline of price in relation to the median price for each day.

The oscillator comes with two rules.

• The first is the standard oscillator rule that has traders looking for a divergence between new price peaks and oscillator peaks. Personal observation suggests that this rule is not particularly useful in Australian markets.

• The second rule, is to use the change in the direction of the oscillator as a buy or sell signal. If the oscillator moves up above the zero reference line then a buy signal is generated. This is only acted on if the stock is already in an up trend. The up trend is defined traditionally by a 90 day moving average. This is probably a bit slow, leaving too much room is current volatile markets. We find the 30 day moving average to be a more useful indication of the up trend.

If we apply the Chaiken Oscillator to SEN, we see that it confirms the relationships we noted in previous weeks. First SEN is above the 30 day moving average. This sets the trader up for acting on entry signals above the zero reference line because the trend is up. At point A the Chaiken Oscillator moves above zero just prior the major increase in volume that is an initiating signal that we looked at in previous newsletters. We see the same relationship at B, C and more recently at D. When the value moves above the zero reference line and when it is accompanied by an increase in volume, then a buy signal has been indicated.



What this is allowing the trader to do, is to buy the retracements or pullbacks in a trend with a greater level of confidence. When the SEN price falls from its high of $0.70 and makes a low around $0.60, then the Chaiken Oscillator allows the trader to see this price retreat in the context of a continuing trend. This is always a trader’s dilemma. We want to buy into strong trends but we want to get a bargain price. When the bargain price turns up, were not very confident about buying it because we are worried that the trend might have changed and really be starting to go down. The Chaiken Oscillator is a tool traders can use to confirm the strength of the trend and the validity of these cheaper entry points.

The Chaiken Oscillator is not a stand alone indicator. It is most usefully applied as a confirmation for relationships identified initially by other indicators. In momentum stocks these Chaiken relationships are strong and generate few whipsaws. This is less evident in stocks where volume is less erratic.

The Chaiken Oscillator in Metastock is a standard default formula and appears to be calculated on a different basis to that of Trade Station. In the Trade Station version the plot is inverted and also appears to be less sensitive. In using more complex indicators, it is important to be able to get behind the indicator construction to ensure that its implementation is the same as the author originally intended. The manual should provide this background information.


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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.