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Today’s Best Volume Analysis Tool

04/19/2012 9:45 am EST

Focus: TOOLS

John Person

CEO, John Person, Inc.

John Person explains how his application of on-balance volume (OBV) analysis has helped identify key turning points during the recent stock market rally.

I’m with John Person, and John, we have had a rally here in the first part of 2012, and it’s been on light volume. What kinds of indicators are you using to try and find good trades?

Well, actually, the volume started to pick up a little bit in February 2012. January was just like a slow grind higher, and everyone’s now looking for this correction in the stock market because year to date, we were up pretty healthy.

It has happened many times in the last five years: it happened with gold, it happened in the rally that we saw in 2009. No one believed the stock market rally because it was on declining volume, or it wasn’t significant volume. The trend was rising and it wasn’t accommodating with an increase in volume.

There’s a technical tool that was developed 30 to 40 years ago by Joe Granville: on-balance volume (OBV). Instead of just measuring the change of volume overall, what it does is helps to track the volume on the days that are up against the days that are down.

And you can actually look at this and chart this indicator like a price chart so that you can see higher highs, higher lows, and you can see trend line breaks or breakouts.

So that tool actually has been participating in an increasing rally, except for one sector, and that was technology so far.

So let’s talk about on-balance volume on a time frame. Is there a specific time frame that you like to use this on?

Actually, we use that for even intraday trading; we use it on a daily basis, and I like to compare for swing and position trading daily against weekly. So those two time frames tend to mesh very well.

How about the markets that you use this on? Is it the stock market primarily?

E-mini S&P, individual stocks, and ETFs.

And how about position size? Does it tell you anything about the size you should be putting on at these prices?

Well, no. It tracks the volume on up versus down days. Instead of looking at an Advance/Decline (A/D) line where you’d look at up days and down days, or stocks that are up versus down, this tracks volume.

I think that position is a whole other subject, and I think when prices start to get lofty, there are two rules of thumb: 1) When volatility has increased, you reduce your lot size; and 2) When price appreciation has started to outpace its norm, then you want to reduce your lot size.

Is on-balance volume available on most trading platforms these days?

Absolutely. It’s not a tool that you have to buy any special software. I believe every single brokerage firm and every single platform has on-balance volume already in it. The symbol is OBV. It might not say on-balance volume, it’ll just say OBV.

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