Joseph Granville introduced On-Balance Volume in his 1963 book 'Granville's New Key to Stock Market Profits.' The calculation is simple: when the closing price is higher than the previous close, add that day's volume to a running total; when the closing price is lower, subtract it; when unchanged, add nothing. The resulting line moves up when buyers dominate and down when sellers dominate. The absolute OBV value has no meaning in isolation — what matters is the direction and slope of the OBV line relative to price movement.

The core insight behind OBV is that volume precedes price. Informed buyers accumulate positions gradually without moving price dramatically, but their activity shows up as rising OBV even when price appears to consolidate. When their accumulated position reaches full size, they stop buying — but price then rises as other investors chase the move. OBV captured the early accumulation phase that price action missed. This is why OBV divergences from price are treated as leading signals rather than lagging confirmations.

The most actionable OBV signals are divergences. Bullish divergence: price makes a new low but OBV makes a higher low, indicating that selling volume is decreasing even as price slides — smart money is absorbing supply. Bearish divergence: price makes a new high but OBV makes a lower high, indicating distribution — buyers are losing conviction even as price advances. These divergences can persist for weeks or months before price reverses, but they flag the deterioration of the trend's volume foundation.

OBV confirmation is the inverse: when price breaks to a new high and OBV simultaneously breaks to a new high, volume is supporting the price move, lending it credibility. Traders use OBV confirmation as a filter for entries — a breakout without OBV confirmation is suspect and historically has a higher failure rate than one where OBV is leading or confirming. In practice, OBV works best on individual stocks with clear institutional participation rather than highly liquid large-caps where algorithms obscure the signal.

OBV can be used to assess the overall health of a trending market. In a strong uptrend, OBV should make successively higher peaks (a rising series of OBV highs). If price is trending higher but OBV peaks are flattening or declining, distribution is occurring — the trend is aging. This OBV trend analysis applies at different timeframes: weekly OBV divergences often signal multi-month reversals, while daily OBV divergences are more relevant to swing trading and shorter-term positioning.

Sector rotation shows up clearly in OBV analysis across indices. When OBV rises on a sector ETF while price trades sideways, institutions are accumulating ahead of a fundamental catalyst that hasn't yet been announced. Tracking OBV across multiple sector ETFs can identify which areas are receiving institutional capital flows before those flows become visible in price performance — a useful supplement to traditional relative strength analysis.