On Balance Volume

[Lizard]

A query regarding on balance volume.

I have one Aust spec share that I am watching for a buy signal. Generally share price has been trending down along with OBV. Today there was a major drop in my OBV chart as around 3% of shares changed hands and the closing price dropped 0.5cps (4%). However, looking at the trades, 99% of the shares changed hands in a single parcel near the start of trading at a price 0.5cps higher than previous day, with just a few tidbits falling at the lower price later on in the day. On the chart, this looks like "smart money getting out" - yet if the few hundred dollars worth traded later in the day had not occurred, it would have looked the opposite. In this situation, how would the T.A's read this? Smart money in or smart money out - or neither...?

[duncan macgregor]

Lizard, only my humble opinion. I think smart money is definately out. macdunk

[Phaedrus]

Liz,
The problems caused by price action such as you describe are not restricted to the OBV indicator. Under such circumstances any indicator that uses only the closing price is adversely affected - including line charts. An "aberrant" close can easily disguise the true picture.

The answer is to use the VWAP (Volume Weighted Average Price) rather than the Close. This figure is available from most brokers as part of their daily quotes. If the VWAP is up from the previous day then the OBV has risen and the assumption is that the "smart money" is buying. If the VWAP is down from the previous day then the OBV has fallen and the assumption is that the "smart money" is selling.

In your example it would appear that the VWAP may well be pretty much unchanged, so the OBV would not move. It's a bit hard to comment intelligently without knowing the stock and seeing the chart, but given the fact that this was a marked volume spike, you could well be looking at a Price/Volume climax. These often mark significant turning points so I would be watching closely for a reversal here.

Smart money in or smart money out? My guess is that the answer to your question is neither.

[Lizard]

Thanks Phaedrus. The code is LRX. Was reluctant to mention this one, because it has not been kind to holders and I would hate anyone else to read my interest as an endorsement!

I bought a very small and cautious holding in the last uptrend - which quickly slid towards an almost unmarketable parcel, despite the FA doing everything I expected. You can laugh at me for still holding, but at least I resisted the urge to average down, despite my FA scenarios getting better and better...so until something undermines the FA, I have it on close watch for a trend reversal. HY result will be out end of November, so if my FA is on track, I would hope to see a signal before that.

Using VWAP makes sense to me, as does your conclusion.

[Lizard]

For the record, it seems the large volume traded was a fund manager enlarging on an existing holding.