Is The U.S. Equities Divergence In Volume A Concern?
Andrew Thrasher | Oct 25, 2019 03:17AM ET
Volume analysis can be a useful tool in the technician toolbox, providing insight into the supply and demand of a specific security or market. One way we can evaluate volume is through the On Balance Volume (OBV) indicator, which is a cumulative total of the number of shares traded each day, adding the shares when price is higher and subtracting it when price does down. Ideally, we want to see OBV confirming the trend in price. When an security is moving higher and the OBV indicator is moving up as well we can conclude demand is healthy with a positive flow on up days compared to down. When net-volume begins to diverge from price, as a result of more shares repeatedly being traded on negative days, it can provide a possible signal that the volume profile is no longer supportive of the current trend in price.
This divergence is something we’re seeing right now in U.S. equities, specifically the S&P 500 and Nasdaq 100. Going forward I’ll be focusing on the $QQQ).
Here’s the current OBV and QQQ chart, since the Nasdaq began recovering off its summer decline, net-volume has yet to show signs of confirmation over the last 60 days. We can now look at previous times in recent market history where correlation between OBV and QQQ has broken down.
How important is this divergence? I do credence to volume but in my view it’s less impact than other tools we have available like momentum and breadth. If we start to see confirmation of this bearish development in volume by other indicators and ultimately in price then we may see a reversal in trend. However, like we saw in 2018, price can continue higher in the face of a volume divergence and there’s no reason we can’t see the same today. I’ll be keeping a close eye on volume going forward while also tracking other more critical (in my opinion) market gauges for signs of internal market shifts.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
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