Divergence happens when price moves higher or lower and
volume moves in the opposite direction.
So at tops of markets we look for signs of a change of heart
by investors. After a long run like we
have seen in the last eight years we look to see if price heads higher but
volume stays about the same or heads lower.
We use OBV – on balance volume – which is an index - volume
is added or subtracted each day to/from the volume moving average.
Let’s look at OBV for the All Ords:
Click to Enlarge
Take note of the shaded areas - we can see no signs of
divergence at this point. It is more
likely to be seen on a day when there is a spike in price but volume is
low. Such a day might also show the
close of the day close to the opening after the market has reached a major
high.
It is useful to also look at OBV on a weekly chart – or even
monthly. But in such cases ‘the horse
has already bolted’
We could also look at the oscillator for divergence – in
fact many indicators. The oscillator is currently
diverging from price for the All Ords:
Click to Enlarge
But if you check out history you will see that the Oscillator
divergence gives false signals.
But overall right now we do not see any signs or any form of
divergence that should be a concern. But
that is not to say it could not suddenly appear.