If Volume Leads Price …

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On Thursday, the S&P 500 fell for the second straight day with a loss of 0.6%. Breadth was negative, but the up/down volume ratio was positive.

We originally became interested in technical analysis many moons ago because of Joe Granville. He was the guru of the moment. We were a fundamental director of research and were curious as to how he did what he did. So in a sense, our study of Granville’s On-Balance Volume was a precursor to our studies of the Elliott’s Wave Principle.

We mention this because we still do keep an eye on OBV. For various reasons, we nightly compute the total up and down volume statistics for the common stocks listed in the NYSE Composite index. In recent days, the up/down volume ratio has been positive even though breadth and the indexes have been negative. Moreover, the OBV line (the daily cumulative difference between up and down volume) has penetrated its downtrend line from the 2007 highs. Finally, the OBV line from the July reaction low is approaching 50% of the prior March-May line. A 61.8%, or even 100%, relationship would not be surprising.

NYSE Common Stock On-Balance Volume
Granville and others have always maintained that volume leads price. But the bottom line is that this is another example of an indicator that is not diverging from the movements of the S&P. Put another way, this OBV “confirmation” suggests that higher highs are still likely.

This would be in line with our observations that the July-August rally is a five-wave Elliott Wave pattern, which suggests that it is likely the first leg of a larger uptrend. Thus, the current pullback should prove to be only a pause in a still incomplete bear market rally pattern. As such, the door remains open for a deeper probe of chart and Fibonacci resistance in the 1007-1048 range.

While a violation of 958.65 would lock in the rally from the July 8 low as a complete pattern or “wave,” the July low itself at 869 is still viewed as tactical support.