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In August and September of 2012, NFLX made lower lows, but the OBV made a higher low, line d. This monthly positive divergence took 11-months to develop. At the end of November, the monthly OBV moved back above its WMA and the following month confirmed the divergence

The weekly OBV shows a pattern of higher highs from 2010 up through its peak on April 23, 2011. NFLX made another new high the week of July 16 but the OBV formed a lower high, line e. This negative divergence was then confirmed when the OBV dropped below support (line f) the following week, line 4. The July high at $304.79 was very close to the weekly starc+ band at $305.48.

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The weekly OBV stayed below its WMA until January 14, 2012, when there was a strong surge in volume. By the end of April, it was back below its WMA as the OBV formed a downtrend, line i. The OBV formed higher lows in September 2012, line j, while prices formed lower lows (line h). This bullish divergence was also noted in the monthly data, which is a powerful but rare bullish indication.

In October, the OBV moved back above its WMA and broke through its downtrend the next week, line 5. Two weeks later, NFLX also broke through its downtrend, line g, as the OBV was again leading prices. By the end of the November, the monthly OBV had also turned positive.

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The liquidity in NFLX allows for clear hourly OBV patterns in NFLX but as I noted before, this is not always the case. On January 2 (line 1), the OBV moved above its WMA. It stayed positive until the afternoon of January 8, line 2, as its WMA and the uptrend (line a) were both broken. NFLX had stayed above its starc+ band for three hours the previous day.

By the morning of January 10, the OBV was back above its WMA (line 3), and it soon was in a clear uptrend, line b. This OBV support was broken on January 15, and two hours later, the OBV dropped below its WMA. The following day, NFLX had dropped below the starc- band.

In the first hour of trading on January 18, the volume was heavy, which moved the OBV back above its WMA. By the end of the day, the OBV appeared to be forming a short-term bottom as it had again moved back above its WMA. This was three days before it reported very strong earnings as the stock opened at $143.99. The hourly OBV (not shown) was in a clear uptrend before lunch on the day prior to the earnings report.

So how should you incorporate the OBV into your investing or trading? For investors, I think the use of the monthly and weekly OBV data will be one of the best technical tools, in addition to chart analysis, that you can use with or without fundamental analysis. I would use both to find likely buy candidates but use the weekly as the trigger in most instances.

For most traders, I would use the combination of the weekly and daily analysis, along with the starc bands to help keep you from buying at the wrong time. The hourly charts can help with this as when prices are at the hourly starc+ bands, you will often be able to get a better price by waiting a few hours. Of course, Fibonacci and pivot point analysis can be used to help determine your entry points

Also, keep an eye out for the zigzag formations as they can often provide low-risk entry points. Though I provided only bullish examples in this article, at market tops you will often see the OBV rally back to its flat or declining WMA before the selling gets heavy.

Disciplined short-term traders can use a combination of the daily and hourly data on many markets but one should only take hourly signals that are in agreement with the daily trend. Be careful about holding positions overnight if the starc bands have been tested for several periods.

As I discussed in 5 Rules for Success in 2013, pay particular attention to your entries, the risk of every trade, and learn to scale out of your profitable positions.

Editor’s Note: If you’d like to learn more about technical analysis, attend Tom Aspray’s workshop at The Trader’s Expo New York, February 17-19. You can sign up here, it’s free.