Get an Edge on Wall Street With This Critical Indicator
Editor's note: Get in alongside the "smart money"...
Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – built his Power Gauge system using everything he learned during his 50-plus years on Wall Street. He created a series of proprietary stock indicators like the industry-standard "Chaikin Money Flow" to level the playing field for investors – and help them avoid likely losers.
Now, some of Wall Street's biggest firms and traders all over the world rely on his data.
In today's Masters Series, adapted from the December 20 and December 23 issues of the Chaikin PowerFeed e-letter, Marc shares how he keeps up with what the smart money on Wall Street is doing...
Get an Edge on Wall Street With This Critical Indicator
Since my first day on Wall Street in the 1960s, I've obsessed over trading volume...
I believe it's a "missing link" for success in the markets over the long term.
After all, without volume, a stock wouldn't have any price action. Instead, it would just trade in a straight line.
The act of buying and selling shares of a stock sets the market's price.
To find the best stocks, you need to know what that buying and selling really looks like. It's about "looking under the hood" and getting a sense of what's behind a stock's movement.
After I first got this concept in my head... I couldn't let go of it.
I started looking at everything I could find in terms of trading volume...
One of the first stops in my journey was learning about financial writer Joseph Granville in the 1970s. He developed a simple-but-effective idea called "on-balance volume" ("OBV").
Every day, Granville would track a stock's price and whether it was up or down. He then added or subtracted that day's volume from his OBV line. And he used the data to make calls about a stock's potential path.
It was a great way for me to dip my toes into the concept of trading volume.
But I wanted more...
So I started reading research from author and trader Larry Williams. He's still active today.
Williams wrote a couple of seminal technical-analysis books in the 1970s. And importantly, he created what became known as the "Williams Accumulation/Distribution indicator."
In short, Williams focused on a stock's closing price versus the opening price. And at the time, it provided a big step forward over other published work in terms of trading volume.
That's when it all really clicked for me.
I used to compute Williams' math by hand using a "Bowmar Brain" calculator...
The calculations themselves weren't hard. But collectively, it produced a ton of work. And I had to do it every day for every stock I was watching.
The ticker tape never stopped. So I needed to continuously update my calculations.
That made trying to get ahead of the market hard enough.
Then, something small happened in the world. And it changed the direction of my life...
Around 1978, newspapers stopped publishing granular price data on stocks...
The New York Times, Wall Street Journal, and other publications would print the open, high, low, and close prices for stocks every day. And importantly, they would also print the volume.
But for some reason...
They all decided around the same time that it wasn't necessary anymore.
Frustrating doesn't even begin to describe my feelings at the time.
I had found the pot of gold at the end of the rainbow. Then, without any input from me, the leprechaun ripped the pot right out of my hands.
The data I needed had vanished.
But I wasn't going to give up.
So I set out to create a new formula like what Williams had done.
I knew I could compare a stock's opening price with its average price for the day. And I could do the same thing with the closing price and the average price.
That worked – and frankly, it was even better than Williams' way. Then, it dawned on me...
I needed to look at how institutions buy and sell stocks.
Put simply, the real buyers – the market's most powerful players – typically get in toward the end of the day. This idea is the foundation of my proprietary Chaikin Money Flow indicator.
That's the short version of how this indicator came to be...
I developed the Chaikin Money Flow indicator way back in 1982. And to be honest, I'm amazed that it works as well as it does 42 years later.
Obviously, I believed it would work when I built it. But what I mean is...
I didn't realize the tool would soon become such a major "stock analysis cheat code."
You see, the Chaikin Money Flow indicator works so well that hedge funds and billionaire investors now use it. It's even built into the Bloomberg Terminal. And Bloomberg's biggest competitor (Thomson Reuters) uses the indicator, too.
This tool focuses on what I call "accumulation."
The concept is easy to understand...
We want to know what the smart money is doing. "Accumulation" is simply the word for that. And as an investing tool, it works better than you might imagine.
Knowing what hedge funds and billionaires are doing with their money is like sitting in on private board meetings. This was made incredibly clear to me around 1989...
At the time, soft-drink maker Coca-Cola (KO) wasn't a popular stock.
The company had released "New Coke" in 1985. As you might remember, the wackos in management tinkered with Coke's formula to try to make it more appealing. They basically force-fed it to consumers.
But of course... the public didn't really want New Coke.
The whole thing bombed. Within three months, Coca-Cola went back to its original formula. And the event went on to become one of modern history's most famous marketing disasters.
Well, in the late 1980s, I noticed something odd in my analysis...
Coca-Cola's stock was accumulating money behind it. And importantly, the accumulation was persistent.
I learned early on that persistency matters. You don't open a position of 23 million shares overnight, after all.
That's how many Coca-Cola shares legendary investor Warren Buffett bought when he established a position through his holding company Berkshire Hathaway (BRK-B). And I spotted that persistent accumulation by using the tools I had developed in my career.
It was an amazing feeling. I had uncovered Buffett's massive position before it became public, just by watching as a ho-hum stock accumulated cash behind it.
Coca-Cola went on to become one of the best-performing stocks of the next decade. It returned around 27% per year over that span, roughly doubling the overall market.
Simply put, using the Chaikin Money Flow indicator can help you track the buying and selling patterns of the so-called "smart money" on Wall Street.
And today, it's one of the most important pieces of the Power Gauge for determining which direction a stock might be headed next.
It's like sitting in on private board meetings. And it's a tool that helps level the playing field with Wall Street.
Good investing,
Marc Chaikin
Editor's note: Whether you have money in the markets right now or are waiting on the sidelines, Chaikin Analytics chief market strategist Pete Carmasino believes the early days of 2025 could determine your wealth not just for the next four years – but for the next decade.
That's why he recently went on camera to share his broad market outlook for the new year and reveal how you can prepare for this looming market shift. Learn more here...