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Figure 3

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The OBV is also a valuable tool when analyzing the various market sectors. The Dow Transportation Average is one that I monitor closely. The weekly OBV on the Transports confirmed the March 2009 lows before rising sharply, and by that summer, it was in a clear uptrend.

The OBV peaked in August and then developed a trading range, as indicated by the resistance at line b. The Transports had a corresponding level of resistance at 4287, line a. In late February, the OBV moved above its weighted moving average and two weeks later overcame the resistance at line b. This breakout coincided (line 1) with the close in the Transports above the resistance at line a.

The Transports rallied almost 8% before peaking at the end of April 2010. The Dow Transports consolidated for the next four months, but in the first week of September (line 2), the OBV moved to new highs when the resistance at line d was overcome. The Transports did not overcome the corresponding resistance at line c until eight weeks later, in November.

The Transports made a short-term peak in mid-February 2011 and then declined 7.9% from the highs. The OBV held up much better than prices, and just three weeks later, it made new highs (line 3) and again lead prices higher.

Both the Transports and the OBV made new highs in early May, but as the Transports made a new high the week ending July 7 (line e), the OBV formed a lower high. This may be a significant divergence and does warrant close watching. A drop below its WMA would be an additional warning sign. A violation of support at line g would indicate that an interim top was in place.

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