THE REPEATING STORY OF ON BALANCE VOLUME: Seeking

THE REPEATING STORY OF
ON BALANCE VOLUME:
Seeking History
George A. Schade, Jr., CMT
Market Technicians Association
September 25, 2013
To write well about history you [need an] insatiable
curiosity, critical intellect, disciplined imagination,
indefatigability in the pursuit of truth and a slightly
weird vocation for trying to get to know dead
people by studying the sources they have left us.
Felipe Fernández-Armesto
What is history all about if not the exquisite delight
of knowing the details, and not only the abstract
patterns?
Stephen Jay Gould
2
Letters to the Editor
Technical Analysis of Stocks and Commodities
Editor,
I enjoyed D. W. Davies’ January 2004 article, "Day trading
With On-Balance Volume." As a point of reference, I need to
point out that while Joe Granville (for whom I have utmost
respect as a technician and friend) popularized the term onbalance volume, the idea was originally called cumulative volume
and was presented in a course written by Woods and Vignolia in
San Francisco in 1946.
Larry Williams
Editor: Thank you for pointing this out. It's always important to
know history.
3
The Telephone
• February 14, 1876
U. S. Patent Office
A Random Walk
• Brownian Motion
• Louis Bachelier - 1900
• Alexander Graham
Bell
• Albert Einstein - 1905
• Elisha Gray
• Black-Scholes - 1973
4
The Innovators
Paul Clay - 1932
Wall Street
Frank Vignola and Maude V. Woods - 1951
California
Edward B. Gotthelf - 1948
New York
Joseph E. Granville - 1961
Wall Street
5
The Expression
• “On balance” - net effect or result after considering or
offsetting all relevant factors.
• May 24, 1893 - The New York Times reported that loans
due had been paid and, in recent days, the Bank of England
had received £466,000 of foreign gold on balance.
• October 18, 1908 - The New York Times reported that a
liquidating movement in American securities had forced
London to sell on balance not less than 25,000 shares.
• June 30, 1922 - The New York Times reported that several
houses with Southern connections had sold cotton on
balance.
6
The Calculation
• All volume is assigned to correspond to the direction of the
day’s close.
• If today’s close is greater than yesterday’s close then:
OBV = Yesterday’s OBV + Today’s Volume
• If today’s close is less than yesterday’s close then:
OBV = Yesterday’s OBV – Today’s Volume
• If today’s close is equal to yesterday’s close then:
OBV = Yesterday’s OBV
7
The Technical Theory
It is not price action, but volume - the amount of
money, the supply and the demand - which best tells
the story.
Humphrey B. Neill (1931)
Volume is the steam in the boiler that makes the little
price choo-choo go up- and downhill.
Joseph E. Granville (1984)
8
Humphrey Bancroft Neill (1895-1977)
9
A Consistent Theory
• Theoretically, the reason we study volume is because it is
believed that it is a measure of supply of and demand
for shares. Harold M. Gartley (1935)
• The Continuous Volume Curve is a key to the supply
and demand equation. Frank Vignola and Maude
Vignola Woods (1951)
• Price will rise only after the volume equation is thrown out
of balance by quietly increased demand. Conversely,
when heavier, silent selling occurs, supply will overcome
demand, and only then will price fall. In either case the
alteration in supply and demand must take place before
the move in price. Joseph E. Granville (1984)
10
The Assumption
• Volume often tends to precede Price.
• Volume will give you indications of pending
moves, often when nothing else will.
Humphrey B. Neill (1931)
• Volume tends to “lead” the price movement
and it is in this respect that volume may
constitute a forecaster. Wetsel Market
Bureau (1934)
• On-balance volume can be a particularly
effective “early warning” of future price
movements. Joseph E. Granville (1963)
11
Paul Clay - 1932
The movements of the stock market represent the net result of the
industry of the United States and a considerable proportion of the rest of
the civilized world. Because of this conclusion, Mr. Clay had been led to
construct a new index similar, in general, to the Dow theory, but not based
upon the Dow methods. This index number he calls a psycho-technical
index. It contains five principal elements:
1. A volume index number made by giving the sign of the
price movement to the daily volumes, and accumulating the plus
and minus movements….
The psycho-technical index built out of these five elements looks much
like a price chart with the false movements eliminated.
It has the very distinct merit of often moving contrary to the course of
the market itself. This index is not used independently, but rather in
conjunction with the economic indexes which formerly constituted the chief
reliance of Mr. Clay.
12
Paul Clay’s Career
• Moody’s Investors’ Service, 1912/1913 -1928, Vice President
and Chief Economist
• Sound Investing, 1915, 1920
• How and When to Buy and Sell, Moody’s Magazine, 1916
• Forbes Magazine, Economist and Columnist, 1919-1922
• Stock Valuation Expert Witness, Ford Motor Litigation, 1927
• Economist, U. S. Shares Corporation and Supervised Shares
Corporation, 1931-1933
• Editor, Brookmire Bulletins, 1934
• SEC Registered Investment Adviser, 1940
13
Brookmire Economic Service
• Printed colorful, oversized charts of pricing cycles of
hardware, steel, and iron, and a business barometer
of economic conditions.
• Pioneer in constructing barometric indexes by
combining several statistical series each of which
tended to reverse its direction of movement in
advance of the factor which it was desired to
forecast.
• Emphasis upon forecasting by means of historical
comparison.
14
Edson Beers Gould, Jr.
My first ten years on Wall Street, during the 1920’s, were spent working at
Moody’s, primarily for Paul Clay, a brilliant economist and market forecaster.
Much as I respected Clay, much as I admired some of his work, especially
his long-term forecasts, it became increasingly evident to me that he was
missing something.
He concentrated primarily on forecasting business and monetary conditions,
and he was good at both, probably the best around. Then he would transmute
his findings into stock market views. His long-term forecasts of stock market
trends were excellent, his intermediate-term forecasts fair, but his short-term
views left much to be desired.
I recognized that economic and monetary forecasts and trends were vital in
projecting stock prices three and four years out, but came to the realization
that they could have little value when trying to forecast stock prices over a
period of weeks, several months, or even as many as two years.
Then, as the roaring twenties passed into history, the pace of the market
increased markedly, lending emphasis to my thoughts. (emphasis in original).
15
American Statistical Association, April 17, 1925
The New York Times, April 12, 1925
16
American Statistical Association, April 17, 1925
• Clay rejected using an automatic barometer or combining
certain barometrical returns to obtain a barometer or index
number which is supposed to move ahead of the stock
market and indicate its course.
• Rejected chart reading then the most popular method of
forecasting.
• The stock market is a creature of every day economic
forces. Presumably, if we had an accurate measure of”
surplus earnings of industries in prosperous times and their
capital shortages in depression times, we should know
exactly what the stock market is going to do.
• Considered employment levels, credit availability, extent of
bank loans, inflation, corporate earnings, and interest rates.
17
Harold McKinley Gartley (1899-1972)
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Harold M. Gartley’s Articles
• September 19, 1932 to December 5, 1932 - Gartley writes 12
articles published in Barron’s National Financial Weekly
headlined Analyzing the Stock Market
November 7, 1932 - Analyzing the Stock Market: The
Significance of Volume of Trading
•
1933 - Articles are compiled in the course Stock Market
Studies
• 1935 - Gartley’s book Profits in the Stock Market: The Gartley
Course of Stock Market Instruction is published
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Studying Volume in 1932
• NYSE data neither included nor accurately reported all the
volume (notably since 1928).
• Serious mechanical problem in the study of total volume
because the New York Stock Exchange published volume at
unequal intervals: 10:30 a.m., 12:10 p.m., 1:30 p.m., 2:10
p.m., and 3:00 p.m. Analysts had to compensate for the
shorter two-hour trading sessions on Saturdays.
• Debate as to whether or not volume should be plotted on
arithmetic scale or logarithmic scale.
• Corrosive force of manipulation caused unusually large
fluctuations in volume confusing the analysis.
• Limited automation of Burroughs adding machines and IBM
punch-card computers.
20
NYSE Trading Floor in 1933
21
Wetsel Market Bureau’s 1934 Trading Course
• Market historian James E. Alphier (1947-1990) had
a course written in 1934 that uses the concept of
OBV.
• Alphier was likely referencing Wetsel’s 1934
trading course.
• Wetsel’s course does not contain a calculation
similar to that of OBV, but explains how volume
tends to lead price, OBV’s basic assumption.
22
Frank Vignola and Maude Vignola Woods - 1951
The Magazine of Wall Street and Business Analyst, March 30, 1946
23
Vignola’s Volume Curves
• Aggregate Volume Curve - 10-day moving total of
aggregate volume. Saturday’s volume was doubled to
account for the short session.
• Major Volume Curve - 30-day moving total of aggregate
volume. The Aggregate and Major Volume Curves are time
based series, but Vignola’s third series differentiated between
buying and selling volume.
• Continuous Volume Curve - Vignola’s OBV
• All three curves have to trend in unison for a buy or sell
signal to be given.
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Continuous Volume Curve
• Is made by adding the total daily market volume of trading to
a base index figure, each day the market advances; and by
subtracting the volume on days when the market declines.
• Vignola suggested a base number of 50 or 100 million.
• Vignola determined an up or down day by the number of
issues advancing or declining each day, which he believed to
be preferable because they represent the action of the entire
market, not the price trend of a few stocks. However, if the
number of issues traded is not available, use the closing price
of the Dow Jones Industrial Average.
• Vignola’s daily OBV was based on the direction of closing
price, but he maintained a weekly Continuous Volume Curve
based on weekly advances and declines.
25
Continuous Volume Curve, April - August 1949
26
Using the Continuous Volume Curve
An auxiliary timing device used in connection with other
technical condition indices. It is extremely sensitive to price
movement, and will indicate the relative balance between
buying and selling at the peaks and valleys of market trends.
MINOR FLUCTUATIONS OF THE CONTINUOUS VOLUME
CURVE follow the daily trend of the Industrial Average, and it is
often difficult to distinguish the difference between them. This
does not hold true with intermediate and major trends. The
main price trend will often precede or lag volume action. The
Continuous Volume Curve is a key to the supply and demand
equation. Interpretation of this curve is based on a knowledge
of divergence, and the breaking of established trend-lines and
previously established points of trend reversal. (Vignola’s
emphasis)
27
Continuous Volume Curve, April - July 1949
28
Edward B. Gotthelf – 1948
Gotthelf’s On-Balance Volume and Open Interest Method
Date
Price
↑
↑
↑
↓
↓
↓
↑
↑
↓
Volume
+↑
-↓
-↓
-↑
+↓
+↓
+↑
+↑
+↓
Open Interest
+↑
+↑
-↓
-↑
+↓
-↑
-↓
+↑
+↓
Value
+
0
-
-
+
0
0
+
+
Net plus and minus days are counted. If on balance net
pluses outnumber net minuses, buy. If minuses exceed
pluses, sell. If net pluses and minuses are about even,
stay neutral.
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Conclusions
• Recognition for OBV’s invention must be shared, but the
historical evidence of the contributions of Frank and
Maude Vignola is the strongest.
• Until proven otherwise, we must believe Clay, the
Vignolas, Gotthelf, and Granville had no contact with
each other or knew of the others’ work.
• They believed volume could presage the direction of
price, and a cumulative count was a valid way to analyze
buying and selling volume.
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