What is "On-balance Volume" (OBV)

It is a volume based indicator developed by Joseph E. Granville to detect whether a financial instrument (stock, commodity, bond...) is being accumulated or being distributed. The computation is simple, "On a day when the stock closes higher (buyer dominating - accumulation), its total daily volume is added to a cumulative total. when the stock closes lower (seller dominating - distributing), its total daily volume is subtracted from the cumulative total. The accumulated volume is termed as On-Balance Volume.

I adopted the same concept to monitor the stock market in general to detect whether the current market is under distribution or under accumulation. The following charts are my own daily charts for Dow and the corresponding OBV plot from 1st June 2007 to 31st December 2007. It covers Dow's peak of 14,164 set on 9th October 2007.

OBV peak was set on 13th July 2007 at 34,713 when Dow was 13,907. OBV peak was set three months ahead of Dow's peak on 9th October 2007. During these three months stocks were being distributed as indicated by the declining OBV. On 9th October 2007 when Dow set a historical height, OBV was at a much lower level at 32,524. OBV has given out a sell signal as the big boys were distributing out their holdings. By now we know what has happened after that, Dow dropped from 14,164 (9th October 2007) to 7,552 (20th November 2007) within 13 months. OBV declined in a similar way and set a low of 17,721 on the same day as shown by the two charts below. (From 1st July 2008 to 30th January 2009, it covers Dow's low of 7,552 0n 20th November 2008)


Since 20th November 2007, Dow in general was moving within a range of 8,000 to 9,000 whereas OBV was moving in an uptrend consistantly indicating persistant accumulation of stocks by the big boys. Last Friday when Dow closed at 8,000 the corresponding OBV was at 26,385 which is much higher than the 17,721 low. In fact the last Wednesday OBV peak of 27,584 ( when Dow = 8,375) nearly broke the intermediate OBV height of 27,841 on 8th September 2008 ( when Dow= 11,510). OBV is giving a Buy signal. The current bearish sub-wave 5 of Major Wave A down south that may last until middle of March 2009 (as mentioned in my previous post) can be the last chance to pick up stocks at low price during panic selling. The next questions are "which sector ?", " which stock ?", "how low is low?", "what is the down side risk?". Since I am talking about OBV, one of the criteria must be 'stock with strong OBV'.