Chart of the Day – On Balance Volume (OBV)

by Enis September 4, 2012 12:01 pm • Commentary

If you like charts like I do, then stockcharts.com is a splendid resource.  They also have some decent posts on their own blogs, and today’s chart is pulled from a good post they had last week.

It is a chart of On Balance Volume (OBV), which is a cumulative measure of upside vs. downside volume.  You can read the full post here for more detail, but it’s flashing a warning signal about the upside potential of this market, similar to the many measures of market breadth that are lagging the general market rally.  OBV since January:

 

 

Since the middle of June, the OBV line is basically flat, while the SPX index is 50 points higher.  In other words, over that period, the sum of all the down volume days equals the sum of all the up volume days.  You can see the divergence quite clearly on the chart, but as with so many of these indicators over the past 2 months, the broader market has maintained its strength despite signs of underlying weakness.  I would still expect the stock market to eventually resolve such divergences by selling off back down to lower prices, but as we saw in August, there are no guarantees, particularly with central banks lurking around the world.