KLCI and Its OBV

All stock monitoring software compute the OBVs (on balance volume) of stocks and indices based on price movement. Whenever prices went up, the respective volumes were assigned as positive volumes and whenever prices dropped, the respective volumes were assigned as negative volumes. Summation of all these volumes for a particular stock or index is the OBV for the stock or the index.

For stocks, it is acceptable to me to compute the OBV based on price movement. But for index, I usually compute my own OBV based on market breadth (advance/decline) instead of price movement. The reason is simple, sometime the index can be positive but there are more losers than gainers. And sometime we can have more gainers than losers but the index can be negative. Basically market breadth is a better indicator than index to gauge the direction of the overall market.

From the above figure one can easily notice the obvious difference between the OBV based on closing price and that based on market breadth. 

The OBV based on market breadth has provided sign of distribution as early as end of 2016 and confirmed by August 2017 whereas the OBV based on closing price continued to move up and down together with the index. When KLCI moved very close to 1,900 level in mid-April 2018, the OBV that is based on market breadth has reached its temporary bottom at -100,000. 

The indication is that the 'smart money' has been selling since end of 2016.

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