Money flow analysis
by Steven B. Goldstein and Michael N. Kahn
In 1976, Joe Granville documented several theories of stock market price and volume movements in
Granville's New Strategy of Daily Stock Market Timing for Maximum Profit. The book explained the
calculation and interpretation of on-balance volume, a market analysis technique that compares volume
on up days to volume on down days.
His theory was that, as stock prices move higher in a rising market, volume on days that prices increase
should be higher than volume on days when prices decline. Conversely, volume on down days should be
greater than volume on up days when price is falling. The cumulative sum of up volume less down
volume should move in the same direction as price. If it does not, a divergence exists that may be a
trading opportunity because prices tend to correct in the direction of on-balance volume.
While Granville has fallen out of favor, the theory of on-balance or cumulative volume has not. (See
Stocks & Commodities, "Volume analysis," January 1988.) A fair number of market technicians still
religiously calculate on-balance volumes. The problems with on-balance volume are that only end-of-day
figures are used in the calculation and the calculation does not differentiate between a 1% move in a
security or market on a given day and a 2% move. The weights are determined by volume, not price