Don't Ignore This Chart!

NASDAQ Tumbling; Chaikin Money Flow and Accum/Dist Line Rising - Huh?

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If you've ever used the Chaikin Money Flow (CMF) or Accumulation/Distribution (AD) as indicators to help gauge buying and selling pressure, just make a note that gaps to both the upside and downside are ignored in their calculations.  Let's take the NASDAQ Composite as an example.  Since the end of the year, it would be difficult to argue that the action has been bullish, yet we've seen the CMF and AD rise.  The CMF shows a bullish crossover from negative territory into positive.  Chartists use such crossovers to help confirm a shift from bearish to bullish.  Take a look at the NASDAQ chart below for the past six months:

How could this index fall precipitously for four days and both the CMF and A/D lines turn more bullish?  Well, both of these indicators were developed by Marc Chaikin, but they share one common trait.  Neither of these indicators considers the prior day's close.  Most of the losses experienced thus far this year have occurred at the opening bell with three significant gap downs in the first four trading days of the year.  Both the CMF and A/D line calculations are based on highs, lows and current closes (as opposed to prior closes).  Therefore, if we see the NASDAQ finish a day nearer its high of the day than its low of the day, both CMF and A/D lines will treat such action bullishly and rise.

There are a couple of superb articles in the Chart School on both of these indicators.  If you use them, you should read these articles to make sure you understand how these indicators work.....and sometimes why they don't.  Here are the links:

Chaikin Money Flow

Accumulation/Distribution Line

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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