Greetings, fellow Pro-fundity team members -
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This Week's Guidepost

1. During the past two weeks we have considered the On-Balance-Volume indicator as a tool to help forecast moves in price patterns. The OBV deals with what really moves the price, Volume. Check the Archives link on the home page to review previous Guideposts on this indicator. Lets take time to study some charts. This will help us understand the kinds of messages the market is continually sending and the use of the OBV as an interpreter. We will review charts on a few of last years picks to help.
2. The chart below on the ticker DGTC is a study in the relationship between the OBV line and the price line. In this example we would say the volume is following price. It is a normal pattern with no obvious messages being sent.


OBV Pattern on Price Chart (ANSR)

3. The next chart displays an OBV line that keeps moving up in early December while the price is trending down. The fact that the volume indicator is not falling with the price suggests there remains some buying pressure in this market. The price awakened the last few days in the month and shot up nicely, confirming the OBV message.


OBV Pattern on Price Chart (AETC)

4. In the following chart, the OBV line seems to be trending upward beginning in May. When we consider the OBV over a longer period, it is often difficult to read the message. In fact, the message has probably come and gone with this perspective.


OBV Pattern on Price Chart (SUIT)

5. If we take the previous chart and focus on a shorter time span, we will obtain better resolution as shown below. In this case we see how closely the OBV tracks the price. The value of the increased resolution is now obvious, looking at the first few days in December. We can see how the indicator begins a sharp rise a few days ahead of the price. This is example of the power of the OBV as a predictor. It would be easy to glance at the chart and conclude that there were no messages being sent. Studying many chart patterns on a continuing basis will help develop chart-reading skills. It has been said the chart reading is more an art than a science. But how do artists perfect their skills? Practice, practice, practice!


OBV Pattern on Price Chart (SUIT)

6. The next chart sends a loud message with the OBV rising for a couple of months with a sideways price trend. But what drives the price of a stock? Volume will usually win this tug-of-war. Had we looked at the chart in early July, we would have found a treasure.


OBV Pattern on Price Chart (ALLY)

7. Now let's come back to earth with the next chart that sends no message. This is the rule (no message), not the exception.


OBV Pattern on Price Chart (CSDS)

8. Look carefully at the following chart the first part of January. The price closed on 1/5/00 at $7.13. It then rose the next day to $7.19 where it stayed for three days. No price action. But where was the volume going? It began a steep rise the day it closed at $7.13 and continued the next three days while the price slept. When the price awakened it rose to $7.44, then $7.63, $8.38, $8.81, to $8.91. A 24% rise in five days. What a message!


OBV Pattern on Price Chart (BIAC)

9. We close this discussion with another chart with no message. We started with no message and we end with no message. The point is that most charts do not send messages. We have to carefully look for them with keen and experienced eyes. For example, the message in the previous chart was not easy to see at first glance. In the chart below, we learn again the lesson that the height of the OBV line is not what is important. The OBV line is exactly on the price in September and early October. The slope of the line is the same as that of the price. In December, the OBV line is much higher than the price. But that does not matter. What matters is that the OBV line is on the same angle as the price.


OBV Pattern on Price Chart (FLOW)

10. And so we conclude this discussion with an assignment. Watch the ticker VERA as it relates to the OBV pattern the past couple of weeks. We will discuss its direction later. Next week we will look at some charts where the OBV forecasts downturns. Stay tuned.