Accumulation/Distribution Line was developed by Marc Chaikin. It is a volume indicator that meausres the demand and supply. It determines whether investors are accumulating (buying) or distributing (selling) securities which takes into account the price and the volume.
When the day’s close is higher than the previous day’s close, the volume is accumulated. The day’s volume is then added to the previous day’s Accumulation/Distribution Line. On one hand, when the day’s close is lower than the previous day’s close, the volume is distributed. The day’s volume is substracted from the previous day’s Accumulation/Distribution Line.
The Accumulation/Distribution Line is calculated by the following steps:
- Compute the Close Location Value or CLV
- Multiply the CLV by the corresponding period’s volume to get the Accumulation/Distribution Line.
The Accumulation/Distribution is a very effective tool in detecting potential price breakouts. It is the type of indicator that identifies divergences between the price movement and the volume. When the Accumulation/Distribution Line forms a positive divergence, a bullish signal may occur. It will be best if the divergence happens over a multi-month than a two-week time frame. As for the bearish signal, a negative divergence formulates.
The Dow Jones Industrial Average Index – Pit develops a positive divergence as shown on the chart above. Even though the prices are forming lower highs and lower lows, the Accumulation/Distribution Line still keeps an upward trend. The market becomes bullish after it broke resistance (green line).