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Tuesday, January 22, 2013

On Balance Volume No Longer Showing Negative Divergence

The best way to measure the Market's On Balance Volume (OBV) is by using the cumulative (up volume minus down volume (source: Tom McClellan). There is really no other way, as using index ETF's volume information is unreliable, since $SPY, $QQQ and $DIA have higher volume when the market is in a downtrend (people like to short them as hedges). Therefore, the cumulative up-down volume of the New York Stock Exchange is the best measurement for OBV as well measuring buying & selling pressure. There had been a huge negative divergence in the indicator since April of 2012. That divergence has finally been eradicated, as shown in the chart below. The interesting thing is the Advance-Decline Issues (stocks that closed green vs red), has continued to make all time highs almost every week, while this volume indicator has struggled. This may be an indication of money printing lifting this market unnaturally. 

 Take note of the chart below as negative divergences have always mattered. On a separate note, I think this market will make higher highs, but as I look through the charts today at the close, the market is really overbought. I think this market is due for a more significant pullback that an intraday-correction cannot fix (this has been the case, which is a sign of a very strong market). As far as I can tell, this pullback (if it occurs) would be a great place to add.