On-Balance Volume And The Dow Jones Utility
by Daniel E. Downing
Between Thursday, October 19, 1990, and Monday, October 22, 1990, the Dow Jones Industrial
Average (DJIA) gained more than 127 points. More important than the points gained in the DJIA,
however, is the volume on which the gain occurred, as well as the small point gain (3.4 points) that
occurred in the Dow Jones Utility Index. The on-balance volume (OBV) line for the New York
Composite Index (an index of every stock listed on the New York Stock Exchange) and the price chart
for Dow Jones Utility Index both broke out above long-term downtrend lines. When breakouts such as
these have occurred in the past, it has led to higher stock prices, generally over a six-month period.
An OBV line is an internal — that is, not based on price — technical indicator for the stock market. The
OBV line is a running sum of each day's volume. If the market closes up for the day, then today's volume
is added. If the market closes down for the day, then today's volume is subtracted.
Generally, technicians look for the OBV line to show positive or negative divergence from the price line
of a particular market — that is, we look for a change in direction or a breakout in the line before a
change in direction or breakout occurs in the index. We base our OBV line on the action of the New York
Composite Index. The composite index rose between October 19 and October 22, 1990, so the OBV line
broke out to the upside. You can see this in the last column of Xs on the far right side of the point and
figure chart in Figure 1.