Volume analysis has played an important role in my analysis for over 30 years. It can be traced back to my discovery in the late 1970s of the late Joe Granville's book New Strategy of Daily Stock Market Timing for Maximum Profit. In this book he wrote "stocks do not rise in price unless demand exceeds supply. Demand is measured in volume and thus volume must precede price."
Over the years, I have explored the OBV in more detail and written extensively about multiple time frame analysis of the OBV in the past few years. In identifying both bottoming and topping formations in stocks or ETFs the relationship of the OBV to its 21-period weighted moving average plays an important roles.
This because you will not always see positive or negative divergences at a major turning point. At a market bottom divergences can be explained by a transition where the demand starts to gradually exceed supply as prices reach a low point. Negative divergences at a top are a result of the fact that fewer buyers (lower volume) are pushing prices higher.
Of course the OBV does not always warn you of tops or bottoms but with so many instruments to trade or invest in the OBV can often lead prices up or down which can help give you an edge. The recent decline in Apple, Inc. (NASDAQ:AAPL) in reaction to its earnings was preceded by strong warnings from both the weekly an daily OBV.
The weekly chart covers both the sharp rally in 2014 as well as the trading in 2015. On March 21, 2014 (line 1), the weekly OBV broke through resistance at line b as it started to lead prices higher. The OBV had been above its 21 week WMA since early February. The stock price did not breakout to the upside until five weeks later so the improving OBV was revealing accumulation of the stock.
Using the 2014 lows, the OBV was in a clear uptrend, line c, that stayed intact until the first week of May. The OBV also made a series of higher high, line d, as it was confirming the price action. This changed on May 5th as the new weekly high was not confirmed by the OBV. The negative divergence, line e, should have put investors as well as traders on notice that the trend could be changing.
The decline the next week dropped the OBV below the prior low creating a new downtrend in the OBV. This confirmed the divergence and the following week the OBV just rallied back to its now flat WMA (line 2). This I have found to be a quite reliable topping formation. The decline in the OBV below the prior lows established the downtrend, line e, as key resistance.
The daily OBV moved back above its WMA in October 2014 as APPL rallied from the $101 level to a high near $119 just before Thanksgiving. The OBV formed a slight negative divergence, based on the daily closing price, at these highs, line c. This was now the key level of resistance to watch.
The chart of $APPL shows that it formed a flag formation (lines a and b) over the next seven weeks. This formation was completed on January 22nd and the following day the OBV (line 1) had clearly overcome the bearish divergence resistance at line c. This created a buying opportunity as the company was scheduled to report earnings after the close on January 27th.
Before the opening on January 27th I reviewed the monthly, weekly, daily and 240 minute charts of $AAPL and recommended buying $AAPL on a pullback even if it came on an earnings miss. Instead the stock declined ahead of the earnings and reached the initial buy level. The earnings were strong and $AAPL gapped sharply higher the next day.
The daily OBV stayed strong until early March as it then developed a trading range that ended on April 27th when it made a marginal new highs. The OBV support that developed in March and April, line e, was broken in early May. As $AAPL rallied to a new daily closing high on May 22nd, point 3, the OBV stayed below its declining WMA (line 2) which was a sign of weakness.
On June 9th the daily OBV support, line d, that went back to the January lows was broken. The lower lows in the OBV were consistent with a new downtrend that was negative. The rally from the July 9th lows was accompanied by well below the average volume as the OBV just rallied briefly above its WMA but that did not change its trend, line f. $AAPL needs to rally above the recent peak and the late June highs to suggest the worst of the selling is over.
This type of OBV analysis can be used on stock, futures and ETFs. The weekly chart of gold I featured last Friday revealed the OBV had dropped to new lows several weeks ago well ahead of prices. The analysis can be done on a number platforms and here are my suggestions.
- Monitor the weekly and daily OBV trend lines
- Watch the relationship of the OBV to its WMA on multiple time frames.
- Determine whether the WMA is rising or falling.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.