Volume indicators are often used to confirm the validity of price movement. Whether your analytical approach is based on Elliot, Gann or your own mix of technical indicators, price action requires a confirmation signal from volume if it is to be used as a basis for trading.
At the Wealth Strategies CFD workshop, we look for an ascending triangle breakout with a supporting volume increase. Work by Bulkowski suggests that this pattern is 98% accurate – if the volume component is in place. An understanding of volume can also help us avoid being duped by a false breakout.
On Balance Volume (OBV) was developed in 1963 by Joseph Granville as a method of identifying the true direction of money in the markets. The way it works is simple. You add volume to the OBV if the day’s close is above its open; you subtract volume from the OBV if the day’s close is below its open. The calculation gives us an indication of the number of participants involved in a price rise or fall. A rising or falling price with few participants has a minimal effect on pushing OBV up or down; a price move with many participants (or large volume confirmation) has a major effect.
Under normal circumstances OBV will faithfully mirror price action as traders buy and sell shares in line with general market sentiment. Occasionally, however, large players (such as institutions) accumulate or distribute positions in anticipation of price changes. In such cases OBV can diverge with price.
Looking at the US 30-year bond in the chart below (US-Spotv in ProfitSource) – and following on from my last article – you can see that price action continues to flow in the direction of the channel.
click chart for more detail
This part of the yield curve is extremely important since it mirrors economic expectations, in particular the mortgage market in the US. Price action shows that resistance has been breached and that our target from the September and October double top has been reached.
By consulting the OBV we can see that there has been considerable consolidation over this period. Little money came out of the market, and little money came in. This is a market that is biding it’s time before committing to a directional play.
At the moment the forces are in place for prices to rise and yields (and therefore interest rates) to fall. However the chart is suggesting that this might not happen in the near future. We may well begin to see some upward momentum into the end of the year.