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Technical Analysis, Studies, Indicators:
Volume Accumulation Oscillator (VAO)

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Volume Accumulation Oscillator

Volume Accumulation Oscillator (VAO) was created by Mark Chaikin, to show the cumulative volume adjusted by the price (difference between the close and the midpoint). VAO belongs to the group of volume/price based indicators (studies) in the technical analysis.

The Volume Accumulation Oscillator is calculated by the following formula:

If the close price of a stock (index) is above the middle point (Close-High+Low) then all the volume is assigned to the buyers and if the close price is below the middle point then all the volume is assigned to the sellers. VAO assigns volume according to the relationship between the closing price and the average price for the day (see S&P 500 VAO chart below).

In comparison to the On Balance Volume (OBV), VAO is considered more sensitive to the volume-price relationship. The same as OBV the Volume Accumulation Oscillator could be used in the technical analysis to confirm a trend. A rising price with a rising VAO indicates Bullish market while falling price with declining VAO would indicate Bearish market. A divergence between the price direction and the Volume Accumulation Oscillator may indicate changes in the market sentiment and a near-term price correction.

Chart 1: Volume Accumulation Oscillator (VAO)

Interpretation

Divergence between the VAO trend and the price movement could be used in the technical analysis as a sign of a forthcoming trend reversal. In this way the Volume Accumulation Oscillator helps to identify resistance and support levels by comparing volume to the price action.

The VAO is especially valued when the stock (security) price is making new highs/lows while the oscillator starts to move in opposite direction. The "Buy" Signal could be generated when the VAO starts to rise while the price is still moving down; respectfully the "Sell" signal could be generated when in rising market the VAO starts to decline.

It is a good practice to use the Volume Accumulation Oscillator in conjunction with other technical indicators in a trading system. For instance, using a simple moving average (MA) may help in identifying a security trend. In this case a "Buy" signal could be generated when the VAO starts to rise while the stock (security) price is still below the MA (price still declines), and a "sell" signal could be generated when the VAO starts to decline while the stock (security) price is still above the MA (price still moves up).

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