Technical Indicators: O
On Balance Volume (OBV)
On Balance Volume (OBV) is a momentum indicator that relates volume to price change. Joseph Granville presented the idea that volume will precede price in his 1963 book, New Key to Stock Market Profits.
On Balance Volume keeps a running total of volume 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. A close lower than the previous day's results in all of the day's volume considered down-volume. A rising OBV is defined as a sign of smart money flowing into a security. As the public then moves into the security, both the security and the OBV will surge ahead. If price movement precedes OBV movement, Granville calls this a "non-confirmation." Non-confirmations can occur at bull market tops, when the security rises before/without the OBV or at bear market bottoms when the security falls before/without the OBV.
When the security's price closes up, the day's OBV is created by adding the day's volume to the cumulative total. Subtract the day's volume from the cumulative total when the price closes down.
Look for rising trends (when each new peak is higher than the previous peak and each new trough is higher than the previous trough) or falling trends (when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough) to signal a "breakout." OBV breakouts normally precede price breakouts and investors should buy long on OBV upside breakouts and sell short when on OBV downside breakouts. An OBV is moving sideways is in a doubtful trend and implies a hold until the trend changes.
It is the direction of the OBV line (its trend) that is important and not the actual numbers themselves as actual values will differ depending on how far back you are charting.
| |
Open-10 TRIN
The Open-10 TRIN function is a market breadth indicator that uses advancing/declining volume and advancing/declining issues to measure market strength.
The Open-10 TRIN is similar to the Arms Index, Advancing/Declining Ratio, and the Upside/Downside Ratio in that it makes a good overbought/oversold indicator. Extremely low values may indicate that the market is becoming overbought and a sell-off should occur in the near future resulting in lowered prices. Likewise, extremely high values can indicate an oversold market. Readings >0.90 are considered bearish and readings <0.90 are considered bullish.
The Open-10 TRIN keeps running totals of advancing and declining volume as well as advancing and declining issues for the last ten days. It is calculated by dividing the number of advancing issues by the number of declining issues and the amount of advancing volume by the amount of declining volume. The ratio of advancing to declining issues is then divided by the ratio of advancing to declining volume.
Note that the running totals are effectively the same as taking a moving average of each parameter since the division by the length of each average cancels out.
Overbought/Oversold
The Overbought/Oversold function determines the momentum of the market by calculating a moving average of the difference between the advancing and declining issues.
The Overbought/Oversold indicator is calculated by subtracting the number of declining issues from the number of advancing issues and taking a 10-period moving average of this value. Because it uses a moving average the value at the beginning of a data series is not defined until the tenth sample. Readings >200 are considered bearish and readings < -200 are generally considered bullish. When the indicator falls below +200 a sell signal is generated and when the OB/OS indicator rises above -200 a buy signal is generated.
The Overbought/Oversold indicator is useful for determining the momentum of the market. A value above zero is generated when more stocks are advancing (increasing in price) than declining. A value below zero is generated when more stocks are decreasing in price. Broad market indicators are best used for trading against broad market indices through options, futures, and mutual funds. They can also be used to increase the effectiveness of more specific signals by adding confirmation or warning of upcoming trends.
|
