The On Balance Volume is a running total of volumes where the volumes are treated as positive on days the price rose and negative when it fell. This indicator, therefore, rises when prices are rising and falls when prices are falling. The graph is steepest when large volumes are being traded. A steep graph could be interpreted as confirming a strong trend or signalling its end.

Changes in the On Balance Volume generally precede price changes and it is considered as an indication that smart money is flowing into a security if the On Balance Volume is rising. If the security's price movement precedes a change in the On Balance Volume then it is considered a false breakout. These quite often occur at the tops of bull markets and at the bottoms of bear markets.

Divergences between the On Balance Volume and the security's price are a good advance signal that a change in trend is imminent. A divergence has occurred when the On Balance Volume has moved lower but the stock has made a higher high. Prices usually change to confirm the On Balance Volume shortly after this has occurred.

References

Granville, J. New Strategy of Daily Stock Market Timing.