Editor's note: Today, we're sharing a "peek behind the curtain" of one of the Power Gauge's most important factors...
Regular readers might recognize this essay from last December. In it, Chaikin Analytics founder Marc Chaikin shares what led him to create the key Power Gauge indicator that follows what the so-called "smart money" on Wall Street is doing.
And amid this market environment, following what these institutions are up to is particularly useful...
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...
Following the Buying Patterns of the Big Institutions
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 Chaikin Money Flow indicator.
That's the short version of how this indicator came to be...
I created it to follow 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.
Good investing,
Marc Chaikin
Editor's note: Right now, Marc is leveraging this data on the smart money in a powerful way...
As he says, it has the potential to double your money in today's chaotic market by spotting huge potential stock-buying sprees... before they occur. And Marc believes that now is the perfect environment for applying it.
