V.9:3 (121-123): On-Balance Volume And The Dow Jones Utility Index by Daniel E. Downing

V.9:3 (121-123): On-Balance Volume And The Dow Jones Utility Index by Daniel E. Downing
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On-Balance Volume And The Dow Jones Utility Index 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.

ON-BALANCE VOLUME

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.




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