Search the Community

OBV can be used to confirm a price trend, upside breakout or downside break. The chart for Best Buy (BBY) shows three confirming signals as well as confirmation of the price trend. OBV and BBY moved lower in December-January, higher from March to April, lower from May to August and higher from September to October. The trends in OBV matched the trend in BBY. OBV also confirmed trend reversals in BBY. Notice how BBY broke its downtrend line in late February and OBV confirmed with a resistance breakout in March. BBY broke its uptrend line in late April and OBV confirmed with a support break in early May. BBY broke its downtrend line in early September and OBV confirmed with a trend line break a week later. These coincident signals indicated that positive and negative volume were in harmony with price. Sometimes OBV moves step-for-step with the underlying security. In this case, OBV is confirming the strength of the underlying trend, be it down or up. The chart for Autozone (AZO) shows prices as a black line and OBV as a pink line. Both moved steadily higher from November 2009 until October 2010. Positive volume remained strong throughout the advance. On Balance Volume (OBV) is a simple indicator that uses volume and price to measure buying pressure and selling pressure. Buying pressure is evident when positive volume exceeds negative volume and the OBV line rises. Selling pressure is present when negative volume exceeds positive volume and the OBV line falls. Chartists can use OBV to confirm the underlying trend or look for divergences that may foreshadow a price change. As with all indicators, it is important to use OBV in conjunction with other aspects of technical analysis. It is not a standalone indicator. OBV can be combined with basic pattern analysis or to confirm signals from momentum oscillators. 1631516097-Trend-Confirmation.docx

Directional movement can also be important when analyzing the slope. A negative and rising slope shows improvement within a downtrend. A positive and falling slope shows deterioration within an uptrend. Chart 3 shows the Nasdaq 100 ETF (QQQQ) with the 100-day Slope. A 20-day simple moving average was added to identify upturns and downturns. A Slope is rising when above its 20-day SMA and falling when below. Four key crossovers are identified on this chart (green/red arrows). Notice that the crossovers occurred before the Slope turned negative or positive. This is like a leading indication for the Slope. Also, notice the bounce after the negative cross in July 2008 and the retest after the positive cross in January 2009. These early slope reversals foreshadowed a move into positive territory or a trend change, but you should not expect an extended move after every moving average crossover. The 100-day Slope moved below its 20-day SMA in August 2009, yet QQQQ kept moving higher. A declining and positive Slope reflects less steepness in the advance. Notice how the 100-day Slope remained positive as QQQQ continued higher from September 2009 to January 2010. Trade Bias Slope alone cannot be used to participate in an ongoing trend, but it can be used with other indicators to identify potential entry points. In particular, Slope can be used for trend identification to establish a trading bias. A positive slope dictates a bullish bias, while a negative Slope dictates a bearish bias. Once a trading bias is established, a momentum oscillator can be used to identify potential entry points. The choice of momentum oscillator is really a personal preference. The example with Apple uses the 100-day Slope with 10-day Williams %R. The look-back period for the Slope should be significantly longer than the look-back period for the momentum oscillator. The Slope defines the bigger trend, while the momentum oscillator represents a subset of that trend. Chart 4 shows the 100-day Slope moving above zero in July to establish a bullish bias. Only bullish signals are considered for the momentum oscillator. These include oversold readings, centerline crossovers, or signal line crossovers. Williams %R does not have a signal line, but MACD and PPO do. The blue dotted lines show when 10-day Williams %R moves below -80% to become oversold. Notice that these readings correspond with short pullbacks in the stock. Except for the last oversold reading in early December, Apple resumed its uptrend soon after these oversold readings. Relative Strength The Slope of two (or more) securities can be compared to identify relative strength and relative weakness. The chart below shows Amazon (AMZN) with the S&P 500. Both securities are shown with the 20-day Slope (black). The blue vertical line marks a point in early November when Amazon had a positive Slope and the S&P 500 had a negative Slope. Amazon was clearly outperforming the S&P 500 at this time. In fact, when the S&P 500 bottomed in early November, Amazon led the way higher with a move from 117 to 143. Notice that Amazon moved higher even as the Slope moved lower. The Amazon Slope turned negative in mid-December and the S&P 500 Slope was still positive. This situation repeated the second week of January. Based on the Slope comparison, Amazon went from relative strength in November to relative weakness in December and January. During these two months, the 20-day linear regression for Amazon was sloping down while the 20-day linear regression for the S&P 500 was sloping up. Slope measures the rise-over-run of a linear regression. In general, an uptrend is present when Slope is positive and a downtrend exists when the slope is negative. The timeframe depends on the number of days. 10 days covers a short-term trend, 100 days a medium-term trend, and 250 days a long-term trend. As with typical trend-following indicators, Slope lags price and reverses after an actual top or bottom. This does not, however, detract from its usefulness. Trend identification and trend strength are important tools, even for traders. As with moving averages, Slope can be used with momentum indicators to participate in an ongoing trend. 1631516097-Trend-Strength.docx