Developed by Marc Chaikin, the Chaikin Money Flow oscillator is calculated from the daily readings of the Accumulation/Distribution Line. The basic premise behind the Accumulation Distribution Line is that the degree of buying or selling pressure can be determined by the location of the Close relative to the High and Low for the corresponding period (Closing Location Value). There is buying pressure when a stock closes in the upper half of a period's range and there is selling pressure when a stock closes in the lower half of the period's trading range. The Closing Location Value multiplied by volume forms the Accumulation/Distribution Value for each period. (See our Chart School article for a detailed analysis of the Accumulation/Distribution Line.)

(Click here to see a live example of CMF)

The CIENA (CIEN) chart details the breakdown of the daily Accumulation/Distribution Values and how they relate to Chaikin Money Flow. The formula for Chaikin Money Flow is the cumulative total of the Accumulation/Distribution Values for 21 periods divided by the cumulative total of volume for 21 periods.

On the CIENA chart, the purple box encloses 21 days of Accumulation/Distribution Values. The total of these 21 days divided by the total for the 21 days of volume forms the value of Chaikin Money Flow at the end of that day (purple arrow). To calculate the next day, the Accumulation/Distribution Value from the first day is removed and the value for the next day is entered into the equation.

The number of periods can be changed to suit a particular security and time frame. The 21-day Chaikin Money Flow is a good representation of the buying and selling pressure for the past month. A month is long enough to filter out the random noise. By using a longer time frame, the indicator will be less volatile and be less prone to whipsaws. For weekly and monthly charts, a shorter time frame is usually suitable.

Generally speaking, Chaikin Money Flow is bullish when it is positive and bearish when it is negative. The next item to assess is the range, the length of time Chaikin Money Flow has remained positive or negative. Even though divergences are not an intricate part of the strategy behind Chaikin Money Flow, the absolute level and the general direction of the oscillator can be important.

The Chaikin Money Flow oscillator generates bullish signals by indicating that a security is under accumulation. There are three factors that determine if a security is under accumulation. They also determine the strength of the accumulation.

1. The first and most obvious factor is whether the Chaikin Money Flow value is greater than zero? It is an indication of buying pressure and accumulation when the indicator is positive.
2. The second factor is the duration of the reading, how long the oscillator has been positive. The longer the oscillator remains above zero, the more evidence there is that the security is under sustained accumulation. Extended periods of accumulation or buying pressure are bullish, and they indicate that sentiment towards the security remains positive.
3. The third factor is the intensity of the oscillator. Not only should the oscillator remain above zero, but it should also be able to increase and attain a certain level. The more positive the reading is, the more evidence of buying pressure and accumulation. This is usually a judgment call, based on prior levels for the oscillator, but a move above .10 would be significant enough to warrant a bullish signal. A reading above .25 would be an indication of strong buying pressure. You should consider prior levels of the indicator to be sure.

On the Alcoa chart (AA), Chaikin Money Flow actually strengthened while the stock continued to decline. For most of October, the stock traded flat while Chaikin Money Flow remained positive and continued to strengthen. The accumulation levels, as evidenced by Chaikin Money Flow, were very strong in October. The stock fell at the end of October, and Chaikin Money Flow declined in November. When the stock fell, distribution levels never surpassed -.10, indicating that selling pressure was not that intense. In late November, the stock managed a comeback, and broke resistance at 31. Chaikin Money Flow formed a higher low and returned to positive territory to confirm the breakout. Selling pressure dried up quickly and Chaikin Money Flow was able to bounce back in strong fashion. The evidence was clearly bullish, but to capitalize, a trader would have had to act fast.

The chart for Time Warner (TWX) is a bit different. The stock formed a Double Bottom in August and September while Chaikin Money Flow formed a rather large positive divergence. This divergence was not a signal, but would have served as an alert that the selling pressure was decreasing. Divergences can be difficult to act on and should be used in conjunction with other aspects of technical analysis. By the time the stock broke resistance at 52, Chaikin Money Flow had moved from a mildly bearish levels just above -.10 to moderately bullish levels just above +.13. The interesting point about Time Warner is the period from 28-Sept to 22-Oct (gray lines). During this period, the stock traded sideways, but Chaikin Money Flow continued to strengthen as buying pressure intensified. The oscillator moved from +.1208 on 28-Sept to +.2377 on 22-Oct. Buying pressure has nearly doubled. This was a clearly bullish indication and the stock soon obliged with an advance from the low fifties to over 90.

The Chaikin Money Flow oscillator generates bearish signals by indicating that a security is experiencing selling pressure, or distribution. As with the bullish signals, there are three items used to determine whether or not a security is experiencing selling pressure and the intensity of that selling pressure.

1. The first and most obvious bearish signal is when Chaikin Money Flow is negative. A negative reading indicates that the security in question is under selling pressure or experiencing distribution.
2. The second bearish signal is the duration of the negative Chaikin Money Flow reading. The longer the oscillator remains negative, the greater the evidence of sustained selling pressure or distribution. Extended periods below zero indicate that sentiment towards the underlying security is bearish, and there is likely to be downward pressure on the price as well. The length of time can be determined by measuring the percentage of time that the indicator remains below zero. If Chaikin Money Flow is negative to 3 out of 4 weeks, then it would be experiencing selling pressure 75% of the time.
3. The third bearish signal is the intensity of selling pressure or distribution. This can be determined by the oscillator's absolute level. Once the indicator moves below -.10, the degree selling pressure begins to warrant a bearish signal. Any further movement would increase the degree of selling pressure. Marc Chaikin considers a reading below -25 percent (-.25) to be indicative of strong selling pressure. These levels are general guidelines, and determining the significance of a reading's intensity should be based on the characteristics of the individual security and past readings for Chaikin Money Flow.

JC Penny (JCP) is an example of a stock that experienced distribution for many weeks before the price actually fell. Once the price began to fall, the indicator remained in negative territory for an extended period of time. From March to May, Chaikin Money Flow had been positive (green). On 18 May, the stock gapped up on the Open, but the indicator abruptly fell, and turned negative (red arrows). The stock advanced intraday on the 18th, but fell by the Close to end the day near the Lows. Based on the previous Close, the stock advanced. However, from the perspective of Chaikin Money Flow, the stock closed near the Low for the day on heavy volume, which is regarded as selling pressure.

To prove that this abrupt change was not a fluke, the indicator declined further over the next several weeks, and it remained negative for almost 3 months, indicating that selling pressure was strong in the stock. Not only did the selling pressure remain for an extended period, but the intensity of the selling pressure increased, also. Chaikin Money Flow reached a low of -.468 (negative 46.8 percent) while the stock was near its Highs around 50. The stock began to confirm the selling pressure and worked its way down in June and July.

There were a few weeks in August when the indicator turned positive. This might have been seen as bullish, but it lasted a mere 3 weeks, and Chaikin Money Flow only managed to get as high as +.1270. Furthermore, the price action of the stock never confirmed this strength, and it is likely that other price and momentum indicators were bearish, as well. The positive readings did not last long. By early September, Chaikin Money Flow was trading below -.25 and the stock was trading around 36. This was a solid signal that selling pressure in the stock remained heavy, and there would likely be downward pressure on the price before long. The stock subsequently declined below 20, and Chaikin Money Flow has been negative since late August.

All three indications of selling pressure were prevalent in JC Penny (JCP):

1. Chaikin Money Flow turned negative before the stock declined.
2. The indicator remained negative for 6 out of 7 months (85% of the time).
3. Almost all of the negative readings were below -.10 and many times the indicator dipped below -.25.

IBM provides an excellent example of a reaction rally that had failure written all over it. When the stock peaked in July, Chaikin Money Flow was already well off of its Highs. The indicator was still positive and mildly bullish, but could not surpass +.10 to even partially confirm the High. The indicator formed a Double Top in July with both peaks well below +.10. After the decline in late July, the stock began to find support, and rallied in August, but Chaikin Money Flow would have none of it. The indicator broke below -.10 twice, and remained negative for almost the entire month. When the stock reached its September reaction high, Chaikin Money Flow was still negative.

After the September High in the stock, things began to fall apart. On 17 Sept, the stock declined with heavy volume, and Chaikin Money Flow recorded a new reaction low. Each of these items is marked with a blue arrow on the chart. By this time, selling pressure had been evident for over a month. Chaikin Money Flow had been negative the whole time, and had progressively weakened. The sharp decline in the stock on the heaviest volume in over 4 months indicated something was not right. The final straw came when support at 118.5 was broken, and Chaikin Money Flow was trading below -.20.

It is best to choose indicators that complement each other. In a recent interview with Technical Analysis of Stocks and Commodities magazine, Marc Chaikin advises against using indicators that have common characteristics. It would be redundant to analyze both Momentum and MACD. These are both momentum oscillators that are based on the closing price and reflect the rate of change. Their signals will not be exactly the same, but it would be a waste of valuable time to analyze both. Chaikin singles out the Stochastic Oscillator, CCI and RSI as similar indicators. All three are banded momentum oscillators that are good for detecting overbought and oversold conditions. Buy and sell signals are also generated in much the same fashion. All three are excellent indicators, but it would be a waste of time to follow all three when one will be sufficient.

Chaikin Money Flow can be used to identify the tradable trend. If Chaikin Money Flow has been above zero for most of the past three months, then prudence would dictate that the tradable trend is up. The oscillator is indicating that buying pressure prevails. It would not be sensible to attempt a short sale if the tradable trend is up. By identifying the tradable trend, traders can ignore bearish signals and only pay attention to signals that concur. If Chaikin Money Flow indicates that buying pressure prevails, then positive divergences, bullish moving average crossovers, bullish centerline crossovers and bullish oversold crossovers would be potential buy signals. (A bullish oversold crossover occurs when an indicator advances above the oversold line. This would be a move from below 30 to above 30 for RSI). All bearish signals would be ignored, at least as long as Chaikin Money Flow indicated that buying pressure reigned.

One possible combination of indicators would be the following:

• Chaikin Money Flow - A non-trend-following volume indicator to identify buying and selling pressure.
• RSI - A momentum indicator used to identify potential overbought and oversold levels.
• Moving Averages - A trend-following indicator to identify the underlying trend in the stock.
• Price Relative - A comparative indicator to identify the strength of the stock relative to a major index.

These four indicators have little in common and complement each other very well.

With SharpCharts, CMF can be charted above, below, or behind the price plot window. The default value for the indicator's duration is 20-periods, but any period can be used. Simply enter the desired duration in the Parameters text box.

Click here to see a live example of CMF.

Chaikin Money Flow is an indicator that is best used in conjunction with other aspects of technical analysis. This is usually the case with indicators, but probably even more so in this case. The oscillator is unlike a momentum oscillator, and is not influenced by the price change from day to day. Instead, the indicator focuses on the location of the close relative to the range for the period (daily or weekly). This is the strength of Chaikin Money Flow, but can also be its weakness.

Because Chaikin Money Flow does not reflect the change in price from day to day or week to week, large opening gaps are sometimes not reflected in the indicator. Sometimes the indicator moves in the opposite direction of the gap, and creates a misleading picture.

Starbucks (SBUX) formed a large down gap on 1 July with extremely heavy volume. Even though the stock opened more than 10 points lower, it managed to close on the High for the day. Strong Closes indicate accumulation, and the heavy volume amplified this message to cause a large jump in the indicator. The strength was a bit misleading, and the indicator slowly declined over the next 20 days. On the 21st day, the data from 1 July was removed, and the current day's data added. This caused an immediate drop in the indicator. The Chaikin Money Flow was well below zero the next day, reflecting more accurately the selling pressure taking place in the stock.

Even though Chaikin Money Flow can be used on an intraday, daily or weekly basis, it was designed with daily data in mind. One day is an unambiguous time period with measurable volume and a specific Open, High, Low and Close. This preference may lessen in the future, with the proliferation of after-hours trading, but determining the location of the Close relative to the High and Low is still fairly straightforward. When dealing with weekly or monthly data, the beginning and end are less precise. This imprecision can affect the location of the Close relative to the High and Low for the period. Weekly is obviously more definable than monthly, but less definable than daily. This is something to consider when analyzing Chaikin Money Flow with periods other than daily.

Chaikin advocated a 21-day time frame for Chaikin Money Flow. If Chaikin Money Flow is to be used on a weekly chart, a shorter time frame will probably work better. A 21-day period represents about one month of trading, and will allow for some smoothing. A shorter time frame might prove too choppy, but a longer time frame may lag too much. Each security will have its own optimum time frame.

Keep in mind that the short-term trend is not as important as the absolute level. As long as the indicator remains above zero, it is considered bullish. It is also important to gauge the length of time that the indicator remains positive. If the indicator is positive for 7 out of 9 weeks, then buying pressure is the order of the day. The two negative weeks are a blip on the radar, and should not be taken out of context.

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