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I have found that the OBV works on any market that has good volume, and I have long advised cash forex traders to keep an eye on the currency futures, where the volume data is very reliable.

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One of the most simplistic ways to use the OBV is to see if it makes a new high with each price high in an uptrend, or makes a new low with prices in a downtrend. For the past five years or so, I have been reporting on the monthly OBV analysis of the gold futures. The arrows on the above monthly chart of gold reflect the new monthly OBV highs going back to 2003.

On the chart, you will see that each new high in the gold futures has been confirmed by a new high in the monthly OBV. The last closing monthly high in the gold futures was in April and was supported by a convincing new high in the OBV. It is also clear from the chart that the 21-period WMA has acted as a good level of support, as tests of the rising WMA have often marked correction lows.

As I referred to earlier, the OBV is the only indicator that routinely will break out ahead of prices. At the end of December 2008, the OBV closed above resistance at line c when gold closed at $884. It was not until the end of February that the gold futures overcame trend line resistance, line a, at $928.

More serious students of the OBV can also watch for when the indicator is rising or falling more sharply than prices. A good example occurred in the fall of 2010 when the OBV was rising much more sharply (see circle) than gold prices. The chart indicates that gold prices did catch up over the next few months.

If you can’t look at the monthly, weekly, and daily data, then at least look at the weekly and daily data. One of my favorite patterns to watch for is the weekly bottoming formation in terms of price and the OBV.

For 18 months, the OBV for corn was in a trading range, lines e and f. While the price chart was forming lower highs, line d, the OBV was forming higher highs (line e). This was a bullish sign.

In mid-August, corn prices closed above resistance at 412, and this was confirmed by the breakout in the OBV, point 2. For the next eight months, both corn and the OBV were moving sharply higher. The OBV tested its rising weighted moving average in the latter part of November, which presented a good buying opportunity.

Corn prices peaked in April and the new highs were confirmed by a new high in the OBV. But in June, when corn made a further new high, line g, the OBV formed a lower high, line i. The next week, the OBV dropped below its weighted moving average and corn subsequently broke support at line h.

In most cases, an eight-to ten-week divergence in the weekly OBV can lead to a multi-month correction. For corn, it will be important to see if the uptrend in the OBV (line j) does hold.

NEXT: Sector Analysis Using On-Balance Volume (OBV)