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OBV- On balance volume, is absolutely a very important indic...
OBV- On balance volume, is absolutely a very important indicator to be applied in technical analysis.
General Description:
OBV measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days.
To clearly understand how OBV works, we need to get a clear picture on the following terms:
i) Up days are defined as days where the stock is closing higher than the previous close. Then, all the volumes on that day is considered as "up-volume".
ii) Conversely, down days are defined as days where the stock is closing lower than the previous close. Then, all of the day's volume is considered as "down-volume".
This is a hypothetical model on how OBV is calculated:
General Description:
OBV measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days.
To clearly understand how OBV works, we need to get a clear picture on the following terms:
i) Up days are defined as days where the stock is closing higher than the previous close. Then, all the volumes on that day is considered as "up-volume".
ii) Conversely, down days are defined as days where the stock is closing lower than the previous close. Then, all of the day's volume is considered as "down-volume".
This is a hypothetical model on how OBV is calculated:
Here, we just need to note on the 2 important parameters:
i) OBV is cumulative. Thus, it is useless if we just look on OBV on a single day itself
ii) Most importantly, the actual value of the OBV is unimportant; the TREND or the DIRECTION is the most important!
OBV is a LEADING indicator, as we can use OBV to predict the future price change based on the volume flow. Leading indicators point towards future events or anticipate trends in the stock movement. After identify the type of the indicator, we know that we can combine it with a lagging indicator to check for convergence/divergence to anticipate the price-movement.
Here, I will be using my favourite indicator, moving average 30, to combine with OBV in my case studies. I am going to share not 1, but SIX case studies on how we can use OBV in technical analysis.
Case study 1: When both price and OBV are making higher peaks and higher troughs, the upward trend is likely to continue.
Using $Apple (AAPL.US)$ as an example here.
i) OBV is cumulative. Thus, it is useless if we just look on OBV on a single day itself
ii) Most importantly, the actual value of the OBV is unimportant; the TREND or the DIRECTION is the most important!
OBV is a LEADING indicator, as we can use OBV to predict the future price change based on the volume flow. Leading indicators point towards future events or anticipate trends in the stock movement. After identify the type of the indicator, we know that we can combine it with a lagging indicator to check for convergence/divergence to anticipate the price-movement.
Here, I will be using my favourite indicator, moving average 30, to combine with OBV in my case studies. I am going to share not 1, but SIX case studies on how we can use OBV in technical analysis.
Case study 1: When both price and OBV are making higher peaks and higher troughs, the upward trend is likely to continue.
Using $Apple (AAPL.US)$ as an example here.
When APPL first breaks and closed above MA30 on 05Jul2022, OBV also showing a positive up-ward trend. Then, the stock moves up along with the increasing of OBV. Both stock price and OBV are showing higher high and lower low. This indicates the positive volume or buying force is strong enough to support the up-trend movement. Thus, we could see that the stock price keep increasing!
Case study 2: When both price and OBV are making lower peaks and lower troughs, the downward trend is likely to continue.
In this case study, I will be using $Bank of America (BAC.US)$ as an example.
Case study 2: When both price and OBV are making lower peaks and lower troughs, the downward trend is likely to continue.
In this case study, I will be using $Bank of America (BAC.US)$ as an example.
Note on the yellow circle with yellow arrow.s When the stock is below MA30, the overall stock is bearishness. When stock is making lower low, OBV is also making lower low! The downward trend continues. The selling forces is clearly outpace the buying force.
But look at the green arrow part. Do you notice that while the price is still making an obvious lower low, but OBV is stablelized? This suggests that selling force is weaker. This suggests the downtrend is weaker and the stock may move sideways or reverse to up-trend.
When the stock price is closing above MA30 on 17Jul2022, as already indicated by the OBV, the sentiment changes, and the price is moving upwards.
Case study 3: During a trading range, if the OBV is rising, accumulation may be taking place—a warning of an upward breakout.
Here, I will be using $Thermo Fisher Scientific (TMO.US)$ as an example here.
But look at the green arrow part. Do you notice that while the price is still making an obvious lower low, but OBV is stablelized? This suggests that selling force is weaker. This suggests the downtrend is weaker and the stock may move sideways or reverse to up-trend.
When the stock price is closing above MA30 on 17Jul2022, as already indicated by the OBV, the sentiment changes, and the price is moving upwards.
Case study 3: During a trading range, if the OBV is rising, accumulation may be taking place—a warning of an upward breakout.
Here, I will be using $Thermo Fisher Scientific (TMO.US)$ as an example here.
I removed Moving average in this example as MA is meaningless in a range-bound market.
During the period of Mar to Jul 2018, TMO was moving side way, the prices were clearly range bound in between the support-resistance (yellow lines) as indicated in the chart. However, starting from May, we could see that the OBV is increasing and on an-uptrend, although the price was still in side-way trend. Moreover, OBV breakout on 18Jul2018! This shows that although the price was moving side way, accumulation was happening. One week later on 24Jul2018, the price breakout the resistance and move-upward with a strong upward momentum!
Case study 4: During a trading range, if the OBV is falling, distribution may be taking place—a warning of a downward breakout.
The example here is $Philip Morris International (PM.US)$
During the period of Mar to Jul 2018, TMO was moving side way, the prices were clearly range bound in between the support-resistance (yellow lines) as indicated in the chart. However, starting from May, we could see that the OBV is increasing and on an-uptrend, although the price was still in side-way trend. Moreover, OBV breakout on 18Jul2018! This shows that although the price was moving side way, accumulation was happening. One week later on 24Jul2018, the price breakout the resistance and move-upward with a strong upward momentum!
Case study 4: During a trading range, if the OBV is falling, distribution may be taking place—a warning of a downward breakout.
The example here is $Philip Morris International (PM.US)$
It is totally opposite to the case study 3. The price is range bound between support and resistance, but the OBV keep decreasing. Then, the price breakdown below the support price.
Case study 5: When price continues to make higher peaks and OBV fails to make higher peaks, the upward trend is likely to stall or fail. This is called a negative divergence.
This is also called bearish divergence. I love divergence as it is rare and when it is shown, it has a very high probability to anticipate the next price movement accurately!
The example shown here is $Starbucks (SBUX.US)$
Case study 5: When price continues to make higher peaks and OBV fails to make higher peaks, the upward trend is likely to stall or fail. This is called a negative divergence.
This is also called bearish divergence. I love divergence as it is rare and when it is shown, it has a very high probability to anticipate the next price movement accurately!
The example shown here is $Starbucks (SBUX.US)$
A bearish divergence forms when OBV moves lower or forms a lower low even as prices move higher or forge a higher high. The divergence between OBV and price should alert chartists that a price reversal could be in the making.
Notice the yellow arrows where the price moved higher and higher, but OBV was lower and lower. Bearish divergence was formed! We could anticipate the price upward movement was not sustainable, and then, the price closed below MA30 again, and moved downward further.
Case 6: When price continues to make lower troughs and OBV fails to make lower troughs, the downward trend is likely to stall or fail. This is called a positive divergence.
This is also another form of divergence. A bullish divergence forms when OBV moves higher or forms a higher low even as prices move lower or forge a lower low.
Example here is $Snap Inc (SNAP.US)$
Price moves lower high, but OBV was moving higher high. A bullish divergence was formed! Then, the price gapped up in an earning and broke above the support. You may wonder, is that possible to catch the gap up? Indeed, it is not easy. But the increasing of OBV signifies someone was accumulating the stock before the earning. They may already know something? In fact, we could observe the volume and price movement before earning and if we manage to spot the abnormailty, there is a high probably to anticipate gap up or down of an earning move.
Below is the summary for the 6 cases studied above:
Below is the summary for the 6 cases studied above:
That is all for my sharing below.
Please follow me here and subscribe my Youtube Channel here https://www.youtube.com/channel/UCXrx37FdB5C3Lby2m9R3HAQ to get more insight.
See you in the next post!
Please follow me here and subscribe my Youtube Channel here https://www.youtube.com/channel/UCXrx37FdB5C3Lby2m9R3HAQ to get more insight.
See you in the next post!
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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