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Figure 4

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As I stressed earlier, it is important to analyze the OBV in at least two time periods. The Select Spyder SPDR - Energy (XLE) is an ETF that I have covered regularly over the past six months.

XLE formed a series of lower lows (line 1) in the summer of 2010 and reached $48.56 in early July. In contrast, the OBV bottomed in June and formed a series of highs lows, line 2. The bullish divergence suggested that XLE was bottoming.

The initial downtrend in the OBV, line c, was overcome in early October, and when the intervening peak in the OBV was overcome, it confirmed the divergence. The longer-term OBV resistance at line b was overcome in the first week of November (line 3).

A month later, in December, XLE closed above key resistance, line a, which was a bullish sign.

The OBV surged higher for the next five months, confirming each high in XLE, and peaked in early-April 2010. As XLE was making a new high at the end of April, the OBV started to diverge, line d. It violated its weighted moving average in early May and formed lower highs, as noted in the May 12 article “Big Oil’s Big Top.”

The OBV is currently turning up from stronger support dating back to early 2010, but it is below its declining weighted moving average.

So what was the daily analysis telling us during this period? The daily OBV also surged in early November and confirmed each new price high through early March, line g. The daily OBV broke its uptrend, line f, on March 8 when XLE dropped back to first good support in the $73 area.

Because the weekly OBV was positive and had not formed any negative divergences, the action in the daily OBV was consistent with a correction. By March 28, the daily OBV had once again moved back above its weighted moving average. The daily OBV made a new high in April, but the weekly OBV did not confirm those highs.

This made the short-term uptrend in the daily OBV, line h, an important level to watch. Support was violated on May 3, and when combined with the weekly analysis, it suggested that a top was in place. The break in the daily OBV below the March lows provided further evidence.

XLE has not yet even retraced 38.2% of its major rally, but there are some early indications that a bottom could be formed before the end of the summer. To get the “all clear” signal, the weekly OBV needs to move above its weighted moving average, and the WMA must also start to flatten out, as it is currently declining. The daily OBV is still locked in a trading range, lines j and i, but traders should watch for a breakout.

Since there are many more market examples I would like to share with you, I may do a follow-up article if there is interest. Unfortunately, that’s all for this week. Remember, the OBV can also be useful on intraday charts if the market you are following is quite liquid. It’s essential to analyze at least two different time periods, however, and for long-term trend analysis, the monthly OBV is best. Most of the free, online charting services do include OBV analysis, so I encourage everyone to test it on their own.