Monday July 26, 2010
On Balance Volume Explained
Joe Granville introduced the On Balance Volume (OBV) indicator in his 1963 book,Granville's New Key to Stock Market Profits. This was one of the first and most popular indicators to measure positive and negative volume flow. The concept behind the indicator: volume precedes price. OBV is a simple indicator that adds a period's volume when the close is up and subtracts the period's volume when the close is down. A cumulative total of the volume additions and subtractions forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation.
Our Observation
On balance volume then is another internal indicator. One can see that upside volume expanded right into the top of the market April 26. Since then OBV has tracked it to the low seen July 4. The green volume bars show that overall volume was weak into April 26. Since then down days, see Flash Crash in early May, have seen more volume than up days. Just looking at the volume and price action one can sense that our patient, the market, has gotten extremely nervous. The Parabolic SAR shows traders jumping in and out, but at bottom, the OBV shows the balance of trades has been on the sell side. As we said yesterday, short term we are now in reflex rally mode. Like the SPX shown here, many indices are nearing their 200 bar MAs again. This is a selling not a buying opportunity.
And of course after all this about the stimulus, the euro, Charlie Rangel investigated, Lindsey Lohan going to jail, we are right back where we were in May, well Lindsey is not but the market is, ie, a typical summer with lots of nervous action.
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