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OBV is based on the volume value for each bar: if close higher than prev
close OBV=prevOBV+volume, if close lower than prev close
OBV=prevOBV-volume. The general idea is to show if volume is confirming or
diverging from price. There are various enhanced versions of this indicator
but I like simple and OBV is simple.
It is useful on daily futures bars because contract volume is reported daily
(delayed one day). It is also useful on intraday futures bars where volume
consists of the number of trades (ticks) as a clue regarding the activity as
price moves.
What follows are some comments which I posted elsewhere and some examples.
Due to RT list constraints the examples cover 3 messages.
Earl
Often times we occupy ourselves with price and pattern without using the
clues offered by volume and open interest. I thought it might be interesting
to illustrate using volume and open interest patterns on several
commodities.
March Sugar shows some important characteristics which favor long positions.
On Balance Volume (yellow line in volume subgraph) shows strong accumulation
between the June and Sep highs and little distribution during the correction
telling us that volume is strong on up days and light on down days.
Consolidated (for all contract months) Open Interest (magenta line in volume
subgraph) shows a sharp drop in the recent correction suggesting that the
correction has been used to reduce short positions. Finally, note how low
volume was on the final two days of the decline (4 and 3 days ago) which
penetrated the previous low - a good sign (together with the inside day 2
days ago) that the decline is coming to an end.
In the Gold unadjusted continuous contract we see another example. The Jul
low was retested in late August and again in mid-Sept - note how OBV
increased steadily from the June low at the Jul, Aug, and Sep lows. This was
a sign of strong accumulation, especially during the boring month long price
consolidations in Jul-Aug and Aug-Sep (so boring that I forgot to check my
gold charts and missed the trade).. Note also how Open Interest declined
into the Aug low. When we get into the Aug-Sep consolidation we see open
interest expanding - a sign of short selling which contra indicates the
increasing OBV. This is where the COT information might be useful to see who
was selling and who was buying.
In November Beans, we see rough parity in OBV suggesting that
accumulation/distribution is more or less neutral - OBV is most useful when
a consolidation period shows quiet accumulation or distribution.
Consolidated Open Interest has risen sharply telling us that there has been
considerable selling into the Sep/Oct consolidation. Volume has gradually
declined in the consolidation which indicates selling may be drying up.
Unfortunately, the information which might offer some additional clues
(Friday's volume and open interest) will not be published until Monday,
however one might wonder why the sharp breakout through a logical buy stop
area did not provide enough buying and short covering to sustain the rally.
While I don't select trades based on volume and open interest, I do use it
to confirm my price analysis. Generally when there is no confirmation, I
stand aside. Sugar and gold display the kind of confirmation I like to see
in a trade. The message for me in beans is to stand aside until I see the
odds stacked in my favor.
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