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About the MOB Index
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Why Is Trade Volume Important?
As investors we are always looking to make rational sense of the day's trading results. While price movements are well documented and analyzed, the actual trading activity that caused the price change is rarely given more than a brief mention on the nightly news. In fact, for years professional traders and "quants" have been combing through a treasure trove of technical data relating to trade volume while the public has largely ignored this incredibly valuable data.
Technical analysis of trade volume studies the results of buying and selling decisions by participants in the marketplace. Trading volume is a measure of the MOB's size and emotional state. The MOB's behavior can create temporary price extremes that differ considerably from both technical and fundamental equilibrium prices levels. Price is the effect, but volume is the cause.
Price is set by the balance or imbalance of buy and sell orders. Orders to buy and sell are the results of individual and professional investors' deciding to act. If there is no perceived reason to act, there will be no trading. If there is no trading, volume is zero and prices will not change.
To overlook the highly informative clues that volume provides about the broad market, sectors or individual securities is to forgo half of the data that the market provides every day. For individuals to invest without leveraging this key statistic would be financial folly.
Why use the MOB Index?
To answer the question why use the MOB Index to analyze trade volume data we must first understand the reason anyone would use an index in the first place.
An index as a mathematical formula is quite simple:
(Current Value/Historical Base Value) * 100An index calculates the relative value difference between one or many values using a base value of 100. This construct allows the user of an index to observe relative changes across many large values with a much smaller value in the range of 100.
In simple terms:
An index allows an individual to understand how very large numbers are changing like 120 up 20 instead of 4,358,269,692 up 726,378,282.
Really, so why use the MOB Index?
Each country or market center has its own trading level characteristics. The New York Stock Exchange reports over 4 billion shares traded per day, while the Paris Stock Exchange (Bourse de Paris) trades less then 300 million shares per day. Most people are incapable of keeping track or making sense from such large values over time. Further, to track and analyze these statistics globally across all major securities markets would be impossible for all but a few PhD's.
The MOB Index distills global trade volume data across major market centers into simple base 100 values (See Table 1 below). Historical data and analysis is provided to assist investment and trading decisions. When analyzed against a price chart like a country's major stock index the MOB Index provides insight into the demand pressures effecting price movements in that market.
Table 1
When used in conjunction with other technical analysis tools the MOB Index will help the investing public confirm price trends and spot market trend reversals.
Follow the MOB
The basic theory of the MOB Index holds that:
In an upwardly trending market security prices continue to rise due to an increase in demand that is reflected in the traded volume of those securities.
As demand weakens those heightened price levels cannot be maintained and prices will invariably fall.
In a downwardly trending market security prices fall due to increasing sell side pressure characterized by increased trading volume.
As securities reach their price support levels, selling pressure will decrease reflected in reduced trading volume. Prices should naturally begin to rise as demand for those cheaper securities increase.
Using the MOB
Know what the majority is doing and you can determine which direction prices will move. Identify when investors have become an unruly MOB, and you have pinpointed the time at which trading, buying or selling, have reached a maximum. Here are some examples of how investors can profit from using the MOB Index when making trading decisions.
Chart 1
Chart 1 - Explained
On Jan 14, 2008 (A) the S&P 500 Index closed up at 1416.25 on decreasing trading volume. On the same day the MOB Index closed down at 101.69 (B) following several days of decreasing trading activity. This marks a reversal point where trading activity will not be able to maintain current security price levels. We would expect prices to fall.
On Jan 22, 2008 (D) the S&P 500 Index closed down at 1310.50 on heavy trading volume (selling pressure). The MOB Index closed at 157.82 (C). Increasing trading activity (strong selling) drives the S&P 500 down almost 106 points.
Chart 2
Chart 2 - Explained
When a simple 10 Day Moving Average is applied to the daily MOB Index, major reversal points are clearly identified. Chart 2's 10 Day Moving Average displays large peaks and valleys in trading activity that are clearly defined and often predict major market trend reversals.
Point (A) in Chart 2 shows a reversal point at 1497.66 after the S&P 500 had sustained levels above 1450 for over 30 days. At this point the buying pressure that had sustained that level is gone. Over the next month the MOB Index rises sharply (above 180) to point (B). The rise in selling pressure drives the S&P 500 down to 1,330.61, a decline of over 160 points.
Using the MOB Index Ownership Level Analysis
The "MOB Index Ownership Level" Analysis offers investors a unique view on trading data. The "Ownership Level" Analysis tracks the amount of shares ("volume") that were traded at each price range for the market's tracking index. When a large volume of stock accumulates at a certain price range we can assume that this range represents a high level of investor emotion for the market or the stock at that price level. A price level of high volume accumulation could mean the beginning of an intense period of buying or selling, and usually marks the establishment of a new resistance or support level.
Knowing at which price investors have bought their stocks or other securities is a crucial piece of information when trying to determine future price movements in securities markets.
In the Table below, a large number of German market investors bought stock when the DAX was at levels between 4702 and 4894. When the market went down to levels below 4500, many of these people will think "as soon as the market goes back above 4702, I'll dump the stock and at least get out even or with a small loss!". When the DAX does go back up to 4702, these people will start selling, driving down prices again. If enough people bought stock at the 4702-4894 levels, it will make it difficult for the market to go above those levels.
Table 2
This phenomenon is known as "resistance", with its opposite (when a market doesn't seem to go below a certain level) known as "support". Without tools like the MOB Index Ownership Level Analysis it is up to individual investors to estimate the price level and strength of support and resistance levels.
The importance of knowing the Ownership Levels of a market at each price level is an important factor to consider when making investment decisions.
As an investor myself I understand the complexities and often contradictory nature of the vast amount of market data available today. Our goal is to help the public make sense of the global market by providing a simple tool that can be used across all markets and sectors.
Good luck and thank you for visiting MobIndex.com. If you have any questions or comments please contact us at info@mobindex.com.
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