I hope that many of you noticed that in the prior commentary there was no analysis of the OBV. This is a good example of why I find the OBV to be such a valuable tool in determining the strength of both LCD and HCD triggers. Oftentimes, but not always, the OBV will help you identify the most worthwhile signals.
The chart below also includes what happened in GOOG in 2011, as well as detailed analysis of the OBV. It should have been apparent that while GOOG was making a new high in 2011 (point 2), the OBV was forming lower highs, line a. Weekly divergences in technical indicators like the OBV are generally quite significant.
The weekly OBV broke important support, line b, in early March, which confirmed the negative divergence. This is highlighted by vertical line c. The lower lows in the OBV (point 4) confirmed that it had started a new downtrend.
As GOOG was rebounding in the middle of April (line d), which was just two weeks before the doji was formed, the OBV was acting very weak and making new lows. These were a series of strong warnings that this HCD was not going to work out. The stock dropped another $50 per share before it bottomed in June.
Home Depot, Inc. (HD) has been one of the bull market’s big winners rising from a 2009 low of $17.49 to recent high of $71.45. In 2009, HD was making a gradual series of higher highs and in December 2009, the OBV finally broke through its long term resistance at line a.
The OBV has been in a solid uptrend for some time as HD closed in December near the year’s highs. In January 2010, HD declined forming a doji at the end of the month, point 1. The doji low at $27.19 was just above the 50% Fibonacci support at $26.88, which made it a high probability entry level.
The doji high was $28.09, and the following week (point 2), another doji was formed with a close at $27.98 but a high of $29.05, so no HCD was triggered. The following week (line 3), HD closed at $29 triggering the HCD from two weeks earlier. A stop should have been used under $27.19, which was the initial doji low. The OBV also had broken its short-term downtrend, line c, which supported the bullish case.
The following week, point 4, prices started to accelerate to the upside. At the end of April, HD peaked at $37.03. The OBV had peaked two weeks earlier and therefore formed a negative or bearish divergence, line d, at the highs. Three weeks later, the OBV dropped below its prior low, which confirmed the bearish divergence. Over the next ten weeks, the stock eventually dropped below the late January lows.
As regular readers know, I closely follow the Select Spyder ETFs and write about them frequently Best Sector Bets For New Year. When I see that a sector has bottomed out using both the OBV and relative performance analysis, it becomes a sector that I focus on for individual stock picks.
In the summer of 2010, the Select Sector SPDR Energy (XLE) was making lower lows, line a, as it reached $48.56 in early July. The OBV bottomed in early June and was forming a positive or bullish divergence, line c. On the first rally off the lows, a doji was formed (see circle) with a high of $54.72.
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