OBV (On Balance Volume)
On Balance Volume is a cumulative momentum indicator developed by Joe Granville. It uses both price and volume to determine whether money is generally flowing into or out of a stock.
When a stock closes positive, it is believe money is flowing into the stock, so its volume is added to the on balance volume total. When the stock closes negative, it is thought that money is flowing out of a stock, so its traded volume on that particular day is subtracted from its on balance volume total.
The On Balance Volume does have a major flaw in its calculation. It completely disregards how much a stock closed up or down. Common sense says there is a big difference between a stock closing up 10 cents or 2 dollars, but the On Balance Volume does not differentiate the two. Because of this the On Balance Volume should not be used as a short-term indicator. Instead one should simply look at the overall direction to confirm or not confirm whether money is flowing into or out of an issue.
Divergences work here too. If the market moves up while the OBV tops out and moves down, a warning is served that a pullback is near. Likewise if the market moves down while the OBV flattens out and moves up, a short-term bottom is near.
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