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buys near a low. When the other investors catch on to a stock s rise in price, volume will increase and the OBV line will increase rapidly and faster. On the other side, on-balance volume will start to decrease while the price is still rising, indicating that the smart money is leaving the stock. The on-balance volume is also informative when it is decreasing while the price is increasing (diverging). A signal is generated that the rally may not be strong. When the price is declining and the OBV is increasing, the investor shouldn t become too bearish, because a reversal could be coming. General Motors Take a look at Figure 4-2 to see General Motors with its volume. In spring of 2002, there was a clear divergence as volume started a distinct decline while the price was rising. The price peaked at $68.00 and headed down finally to reach support at $41.32 in May. The volume increased as the stock fell to $31.00 a share in October. The volume continued to increase and the price began to rise. It corrected again to $30.00 in 2003 and kept the volume strong. Buyers came on the scene as the price began a slow climb.
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General Motors, January 2002 April 2004
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$70.00 28,000,000 $60.00 General Motors Corporation NYSE: GM $50.00 23,000,000
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PART 1
Research
MARKET VOLUME
Volume as an indicator for individual stocks can be informative or misleading. However, volume as an indicator of the overall market can be significant. In general, the higher the volume, the greater the strength of the market move. When there is a 100-point move on the Dow Industrial Average, the New York Stock Exchange volume will normally spike to a higher than normal level. But it s not usually a spike that sends the signal; rather, it is a broader change. If the NYSE volume has been averaging 500 million shares a day but then steadily increases to 600 or 700 million shares a day, the market also moves. When the Dow Industrials move 100 points on the average or below the average volume, it is a sign of weakness. A market move on weaker volume indicates that many large investors are skeptical, which means that the likelihood of a reversal is high. Take a look at the New York Stock Exchange volume chart in Figure 4-3 for January 1997 through December 1998. Although it s interesting to see the weakness before the October 1997 correction (the Dow Industrials dropped more than 554 points), much of the rest of the volume indicates strength. Volume surges are unlikely when they are
FIGURE 4 3
Daily Volume, New York Stock Exchange, 1997 1998
1,400,000,000 1,300,000,000 1,200,000,000 1,100,000,000 1,000,000,000 900,000,000 800,000,000 700,000,000 600,000,000 500,000,000 400,000,000
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NYSE Volume 1997 - 1998
Heavy Volume, the Price Rises Light Volume, the Price Falls
already near record levels. There is a weakness during the last half of December 1997, but that is not unusual for December, when many traders are on vacation. Volume in 1998 jumped above the 600 million share mark and stayed there during January. It s interesting to note that this time period contains several record volume days for the New York Stock Exchange, as shown in Table 4-1. The tallest single spike on the chart shows the day after (October 28) the big correction in the Dow Industrial Average. October 19 had the second largest volume, with the following day having the third largest volume for that period. These one-day volume records were accurate for the time of the chart. The strength coming back to the market after the October 1997 correction makes one wonder why the market corrected so sharply.
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