Trading volume is a valuable measure to forecast underlying price strength in a market. Rising volume during rallies or corrections can indicate whether strength lies behind the move.

However, there is a study based on volume, which can act as a leading indicator in addition to a confirmation tool.

On-Balance-Volume is a technical study developed by Joe Granville decades ago to decipher money-flow within a security. It is assumed that all volume occurring within a security's market on advancing days is money flowing in. Volume on down days likewise indicates money flowing out.

The majority of market volume is generated by funds and institutions. We can therefore assume a majority of volume on any given day is actually "smart money" from the big players. Knowing which way it flows can offer great insight to a markets strength or weakness.

This simple deduction allows one to plot such volume action on a daily basis. On-Balance Volume in an uptrend making higher highs and higher lows signals continued strength in the underlying.

A continued downtrend with lower highs and lower lows suggests weakness in a given market as well. A flat trend line without clear advance or decline indicates a market at rest, in all likelihood consolidating for its next move up or down.

Strong buy signals are given when an OBV downtrend suddenly reverses itself to trend up. Likewise, an OBV uptrend that breaks through support is clear warning to protect or exit that trade.

Clear trends moving up or down that suddenly switch to sideways or neutral paths are monitored for the next development.

The following market examples depict this action in detail;

(Daily Chart, IBIS)

IBIS had an OBV trend line barely rising from mid-April until late June. Stock prices hugged the $40 price range as the OBV indicator struggled to break resistance.

A sudden rise in OBV abruptly broke this line in late June as prices advanced over 50% within weeks. Astute traders watching for the breakout were ready.

(Daily Chart, KANA)

KANA plunged in April along with most other issues. A bottom near $30 was in place as OBV switched from downtrend to up. Investors buying the new uptrends when they formed could have captured 50% to 100+% returns over the next few months as entry & exit strategies allowed.

(Daily Chart, A)

Agilent painted an ugly chart for bulls as it struggled to find a bottom. OBV trendline followed suit. It even worsened as volume swelled on a significant plunge in July.

However, that downtrend may have been clearly broken this week as Agilent posted significant gains. As covered in previous lessons, steepening trend lines signal that directional move is ending. Buyers alert!

(Daily Chart, MONE)

Your turn. Where on this chart of MONE would you have bought and sold? Can you see any clear trend reversals that could signal profitable market moves?

(Daily Chart, PMCS)

PMC Sierra has a "noisier" OBV line but the process remains the same. Early May's clear trend reversal signaling a buy entry near the $130 price level. Where would you have exited such a play?

Another downtrend formed from early to late July and broke in early August. Would you have entered here? Where would the market have taken you?

On-Balance Volume is an insightful study into positive or negative money flow. Together with other technical tools it can be most useful to identify significant turns in market direction.