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by Dennis D. Peterson
On-balance volume and money flow are two commonly used indicators. Understanding how to use them can provide additional confirmation of a pattern.
Position: N/A
Dennis D. Peterson
Market index trading on a daily basis.
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ON BALANCE VOLUME
Bowl Pattern Confirmation
07/17/00 08:32:15 AMby Dennis D. Peterson
On-balance volume and money flow are two commonly used indicators. Understanding how to use them can provide additional confirmation of a pattern.
Position: N/A
| In my last posting I cited on-balance volume (OBV) and money flow (MF) as having confirming trends for a reversal pattern. On-balance volume is a measure of whether money is flowing into or out of a security. If the security closes higher than the day before then all of the volume is added to the previous sum. If it closes lower then the volume is subtracted, giving you a running total. It answers the question that -- on balance-- has money moved in or out as far as volume is concerned? |
| When using a leading indicator, such as the OBV and MF, you should focus on their trendlines. Shown in Figure 1 is the OBV, and its trendline clearly predicts an upward move for the right side of the bowl. A downtrend is seen in the left side of the bowl. The fact that both the OBV uptrend and downtrend have a shallow slope confirms a bowl pattern. |
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| I also used the money flow indicator. The MF is a cumulative total of the change in today's closing price minus yesterday's close, multiplied by the volume. If today's close is higher than yesterday's, a positive value is added. And if it is less that yesterday's close, a negative value is added. This daily running total also gives a measure of whether money is flowing in or out of a security. Again, we look at the trend to see if we have confirmation. In Figure 1 we can see the flattening, from June 8th through June 21, in the MF trend that warns us of a potential divergence. |
| The price action follows both of the trends. From the OBV an overall uptrend is seen, and from the MF we see that the uptrend will have some hesitation. |
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