OBV

[kittydashwood]

Does anyone have a concise reading to explain how this technical indicator works?

It seems to be a powerfull tool for picking institutional buying of small caps. stocks.

[Phaedrus]

Kitty, These notes are cut directly from MetaStock. One of the things I like about OBV is that there no provision to provide a chosen time period. This obviates the possibility of any charges of "curve-fitting" !
On Balance Volume relates volume to price change. It is calculated by adding the day's volume to a cumulative total when the security's price closes up, and subtracting the day's volume when the security's price closes down.
If today's close > yesterday's close then
OBV = yesterday's OBV + today's volume
If today's close < yesterday's close then
OBV = yesterday's OBV - today's volume
If today's close = yesterday's close then
OBV = yesterday's OBV
On Balance Volume is a running total of volume. It seeks to show if volume is flowing into or out of a security. When the security closes higher than the previous close, all of the day's volume is considered up-volume. When the security closes lower than the previous close, all of the day's volume is considered down-volume.
Joe Granville is the father of OBV and its analysis. We can barely begin to explain a simplified version of OBV interpretation here. If you want further information on OBV analysis, we recommend that you read his book, New Strategy of Daily Stock Market Timing for Maximum Profits (see Suggested Reading).

The basic assumption, regarding OBV analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV. When the public then moves into the security, both the security and the OBV will surge ahead.
If the security's price movement precedes OBV movement, a "non-confirmation" is said to have occurred. Non-confirmations can occur at bull market tops (when the security rises without, or before, the OBV) or at bear market bottoms (when the security falls without, or before, the OBV).

The OBV is said to be in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the OBV is in a falling trend when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend.
Once a trend is established, it remains in force until it is broken. There are two ways in which the OBV trend can be broken. The first occurs when the trend changes from a rising trend to a falling trend, or from a falling trend to a rising trend.

The second way the OBV trend can be broken is if the trend changes to a doubtful trend and remains doubtful for more than three days. Thus, if the security changes from a rising trend to a doubtful trend and remains doubtful for only two days before changing back to a rising trend, the OBV is considered to have always been in a rising trend.
When the OBV changes to a rising or falling trend, a breakout is said to have occurred. Since OBV breakouts normally precede security breakouts, investors should buy long on OBV upside breakouts. Likewise, investors should sell short when the OBV makes a downside breakout. Positions should be held until the trend changes (as explained in the preceding paragraph).

This method of analyzing On Balance Volume is designed for trading short-term cycles. According to Granville, investors must act quickly and decisively if they wish to profit from short-term OBV analysis.

[Phaedrus]

Not very concise - how about this from Investopedia.com :-

Granville went on to explain his theory by stating that when volume increased or decreased dramatically and the underlying issue’s price did not change significantly, then at some point the price would “spring” upward or downward. Now, something very interesting comes out of this theory that seems to hold water. It appears that as the institutions (the pension funds, investment funds and large trading houses) begin to buy into an issue that the retail investors are still selling, the volume is increasing, as the price is still slightly falling or leveling out. Over a period of time the volume begins to drive the price upward and the converse then begins to take over as the institutions begin to sell their position as the retail investors begin to accumulate their positions again. Thus, the term ‘smart money’ begins to appear crystal clear, understanding that the institutions are buying the stock of the ‘average Joe’ at the bottom and then selling it back to him at or near the top. You can also see how the On Balance Volume indicator can suggest major trendline turnarounds.

[kittydashwood]

Thanks for the references I will follow up.
The scenario of rising OBV and stable share price is exactly the phenomena I have been looking at. It seems to be present before most major breakouts of NZX small caps over the last few years.

It would be interesting to know the OBV of the NZX as a whole. Do this figures exist somewhere?

[Phaedrus]

Kitty, Here is a chart of the NZSE50 with the On Balance Volume plotted at the top.
Most of the time, the OBV marches in lock-step with the Index itself. The chart shows two very clear exceptions, though. In January, the OBV turned down, while the Index continued rising. There was an identical divergence again in April. In both instances, the OBV presaged (I don't want to say predicted!) consequent weakness in the Index itself. The OBV led the Index by 1 - 3 [u]weeks</u>.
Isn't TA fascinating stuff?
http://home.ripway.com/2003-11/39768/NZ50001.gif

[kittydashwood]

Interesting rise in OBV as the price declines for SAN.

I suppose the external conditions are promoting the selling, but has someone started to build a stake.
Sealord? GPG? Or is this a technical anomaly?

[port hills]

Just thought I'd refresh this thread for anyone who is interested after reading the NOG thread. :)

[waaihoek]

Thanks Port Hills, very interesting.

W