The Chaikin Money Flow measures buying and selling pressure for a given period of
time. A move into positive readings indicates buying pressure, while a move into
negative readings indicates selling pressure. Traders and analysts can use the Chaikin
Money Flow to confirm price action of the stock. Positive CMF would confirm an uptrend
and a negative CMF the opposite.
Most technical analyst and traders will simply use the Chaikin Money Flow to help
them determine whether or not a stock is trending higher or lower. The astute analyst
and trader will also use the CMF to determine if a stock is not only in the accumulation
phase, but how strongly the stock is being accumulated.
Zero Line Crosses
Buying and selling pressure is simply defined if the CMF index has been above or
below zero for the several preceding months. If the CMF indicator is crosses above
0 from below, it is considered bullish and traders should look to trade from the
long side. Conversely if the CMF line is below 0 from above, it is considered bearish,
traders should look to trade from the short side.
In the chart of Alcoa we see in late 2009 that CMF indicator cross below the zero
line suggesting a trend reversal. AA shares peaked not very long after the CMF indicator
Traders and analyst can draw trend lines on the CMF indicator to aid them in their
analysis. By monitoring how many periods the CMF line has been positive or negative
readings analyst can gauge the strength of the trend. Traders will interpret that
when the CMF has been positive for several months as a sign of sustained accumulation.
The intensity of buying pressure is represented by how high the CMF reading is,
the higher the reading the greater intensity. The more positive and higher is more
intense buying pressure and accumulation.
In the AA chart below, traders would have used the CMF to gauge the strength of
the current trend. From August 2010 we see that the CMF line followed a nice up
trend line until the CMF line peaked in January 2011. Traders would have been watching
for a break of this up trend line to exits longs.
As with many oscillators, analysts and traders will watch for any divergences between
price movement of the stock and the indicator. Bullish divergence is defined when
the CMF indicator makes a higher high, while the price action makes a lower low.
This is interpreted that there is less selling pressure driving shares lower suggesting
an end to the current downtrend. Bearish divergence is the opposite of the bullish
In the Alcoa chart above, note how the CMF line peaked in August 2009 and proceeded
to move lower, while the AA continued to trade higher topping out in January. Analyst
and traders would have viewed the move from with August to January with suspicion
and avoided AA on the long side.
One weakness of the CMF line is it is prone to whipsaws as the indicator will move
back and forth between positive or negative readings. To avoid whipsaws, some analyst
suggest using -.05 and +.05 levels as opposed to the zero line to filter out potential
whipsaws. While filters can help reduce whipsaws, they will not entirely eliminate
Chaikin Money Flow is a good oscillator and it is easy to understand for those who
want to study buying and selling pressure of a stock. Its core philosophy is that
money flow is bullish when the CMF is positive and the bearish when the CMF is negative.
Divergences between the CMF indicator and prices can alert traders that current
sentiment is about to change. The Chaikin Money Flow indicator is unique in that
it uses price and volume in its analysis as opposed to using only price or volume
alone. By incorporating both, the CMF provide analyst with a different perspective
than most other indicators. Like many other oscillators, traders can improve their
performance by using the CMF in conjunction with other indicators, such as the RSI.
Overall the Chaikin Money Flow indicator is a good tool for identifying buying and