On Balance Volume
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On balance volume (OBV) is a technical analysis indicator based on a cumulative total volume. Volume on an up day (close higher than previous close) is added and volume on a down day is subtracted.
The starting point for an OBV total, ie. the zero point, is arbitrary. Only the shape of the resulting indicator is used, not the actual level of the total.
It can be applied to stocks individually based upon thier daily up or down close, or the market as a whole using breadth of market data, i.e. the advance/decline ratio.
OBV is generally used to confirm price moves. The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend more volume on up days than down days.
So when prices are going up, OBV should be going up too, and when prices make a new rally high, OBV should too. If OBV fails to go past its previous rally high then this is a negative divergence, suggesting a weak move.
Ricky Schmidt
February 2, 2007
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