Here's a new technique that can be used to identify when on-balance volume or negative volume is indicating something notable about the direction of the New York Stock Exchange Composite Index. If your objective is to keep the bear away from the door, this may help. By Phillip C. Holt
Analysts have mined the relationship between price and volume for decades. Joseph Granville,
Marc Chaikin, Richard Arms and Norman Fosback, to name only a few of technical analysis'
all-stars, have studied the relationship in depth. On-balance volume, accumulation/distribution,
ease of movement and negative volume are all methods these technicians developed or
popularized to quantify the relationship. Each of these methods produces a series of values that
can be compared over time with price to determine divergence or confirmation, with resulting
analytical insight. Although the methods at issue vary widely, these analysts agree that valuable
information about price movement can be found in the relationship between price and volume.
ADAPTING BOLLINGER'S %B
Certain techniques popularized by John Bollinger can be used to identify divergence between
price and on-balance or negative volume. Ordinarily, market analysts use visual comparison of
price and price-volume indicators to identify divergence, but visually identifying the extent of
the divergence can be especially tricky. Thus, a method that quantifies divergence so it can be
used for objective decision-making is necessary.
John Bollinger popularized the Bollinger bands channel-building technique that is often included
in technical analysis software today. The technique constructs a line that is two standard
deviations above and below a 20-period simple moving average (SMA) of price (see Figure 1).
Bollinger estimates that 85% of a security's daily closing prices will fall within the channel. The
length of the moving average and the number of standard deviations can be adjusted to
circumstance (for example, weekly or monthly prices).