Case study: weekly on-balance volume with trendlines and a 21-period average

On-balance volume is a running total that adds the period's volume when price is higher than the prior period and subtracts it when price is lower. Construction begins from an arbitrary starting volume figure. After about 20 to 30 such points the line can be plotted next to price, so the same chart can test whether participation still confirms the trend.

Weekly confirmation comes first

Weekly observations are presented as the sampling interval that produces the most useful trend readings from on-balance volume. The first interpretive check is whether a new price high or low is matched by a new high or low in on-balance volume. A match is treated as confirmation that the current trend remains intact.

A split in which on-balance volume makes a new extreme while price does not, or price makes a new extreme while on-balance volume does not, is a divergence rather than confirmation.

Trendlines and a 21-period average

Straight lines on the on-balance-volume plot are used to mark simple uptrends, downtrends, support, and resistance. Breaks on that line are described as typically occurring before the matching price breakout.

A 21-period weighted average of on-balance volume is the tested overlay for daily or weekly series. A simple 21-period average is presented as an acceptable hand-calculated substitute. The volume-trend regime is treated as positive when on-balance volume is rising and holds above its moving average, and negative when the line falls below a declining average.

Treasury-bond futures sequences

In the weekly Treasury-bond futures case from mid-1984 through 1986, successive price highs were described as confirmed by new highs in on-balance volume. A later stretch when the volume line made a new high while prices were lower was treated as a constructive split.

In the 1982 to 1984 Treasury-bond sequence, repeated average crossings, a broken multi-month uptrend on the volume line, a triangle shared by price and on-balance volume, and a later split in which price was lower while the volume line was higher were used as successive regime markers.

Deutsche mark sequences

In the Deutsche mark series from 1982 through 1984, joint breaks of matching price and on-balance-volume trendlines, later confirmation by a moving-average cross, and rallies that failed to recapture prior volume-line highs were used to keep the larger downtrend classification intact.

In the 1985 to 1986 Deutsche mark advance, each price high was described as confirmed by a high in on-balance volume, and resistance breaks on the volume line were noted as occurring before the corresponding price breakouts.

An editorial worksheet, not a proof

Editorial reading: treat the sequences above as a market-breadth worksheet. Rebuild the running total from price and volume, then reject a directional hypothesis unless confirmation, trendline state, and the 21-period average all agree. That joint rule is editorial and is not attributed to the archive.