Tom Scollon

Divergence happens when price moves higher or lower and volume moves in the opposite direction.

So at tops of markets we look for signs of a change of heart by investors.  After a long run like we have seen in the last eight years we look to see if price heads higher but volume stays about the same or heads lower.

We use OBV – on balance volume – which is an index - volume is added or subtracted each day to/from the volume moving average.

Let’s look at OBV for the All Ords:

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Take note of the shaded areas - we can see no signs of divergence at this point.  It is more likely to be seen on a day when there is a spike in price but volume is low.  Such a day might also show the close of the day close to the opening after the market has reached a major high.

It is useful to also look at OBV on a weekly chart – or even monthly.  But in such cases ‘the horse has already bolted’

We could also look at the oscillator for divergence – in fact many indicators.  The oscillator is currently diverging from price for the All Ords:

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But if you check out history you will see that the Oscillator divergence gives false signals.

But overall right now we do not see any signs or any form of divergence that should be a concern.  But that is not to say it could not suddenly appear.

Enjoy the ride

Tom Scollon