Separating on-balance volume into breadth and volume

What the line actually records

On-balance volume assigns a session's entire volume as positive or negative solely from whether the close is above or below the prior close. The series therefore responds to price direction rather than to the size of the price change.

The construction is a running sum of signed volume from the start of the series. A session with volume 10 or 20 times its typical level can warp the line for a long stretch afterward.

Absolute on-balance volume readings are not a cross-security strength measure. Raw volume scales differ from one listing to another, and the series has no built-in normalized range.

Isolate the breadth carrier first

A parallel cumulative series that adds only plus one or minus one for each higher or lower close isolates the advance/decline, or breadth, carrier that on-balance volume then weights by volume. That unsigned up/down-day sum is the market-breadth component inside the line.

Component separation means plotting that unsigned sum beside the volume-weighted sum. A contradiction with price can then be traced to breadth, to volume, or to both.

A failed confirmation is not automatically a volume signal

A price low that on-balance volume fails to confirm can come entirely from an improving advance/decline carrier even while the residual volume component makes a new low with price. A late-2018 real-estate fund example followed that pattern.

Where participation sits

A 25-period full stochastic applied to a one-day up/down oscillator and to on-balance volume shows whether more volume sits on advancing days or on declining days. The volume line above the breadth oscillator means participation is concentrated on advancing days. The volume line below it means participation is concentrated on declining days.

Volume-price analysis, in this workflow, is a reading of whether participation is concentrated on up days or down days, and whether that participation moves ahead of, with, or after price.

Three meanings of volume preceding price

Saying that volume precedes price can mean volume shifting before any obvious price change, a short-term volume spike at the start of a large move, or a contemporaneous link between volume and price change. Only the first sense is a true lead hypothesis.

One information-arrival view treats volume and price as nearly simultaneous responses to the same news, which leaves little room for volume to forecast later price. A competing view allows a lag when participants receive news at different times.

A bounded reading of the same series

Expressing on-balance volume as a full stochastic over a chosen lookback reduces the lasting effect of volume spikes. Stochastic normalization converts the series into a bounded reading that can be tracked on one security or compared across securities.