Negative volume index

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The negative volume index (NVI) was introduced into technical analysis by Norman Fosback, and is often treated as a counterpart of the positive volume index (PVI).

The two indicators assume that "smart" money is traded on quiet days (low volume) and that the crowd trades on very active days. Therefore, the negative volume index picks out days when the volume is lower than on the previous day, and the positive index picks out days with a higher volume.

[edit] Construction

If C_t and C_y denote the closing prices of today and yesterday, respectively, the negative volume index for today is calculated by

• adding NVI_yesterday (C_t - C_y) / C_y to yesterday's NVI if today's volume is lower than yesterday's,
• adding zero otherwise,

and the positive volume index is calculated by

• adding PVI_yesterday (C_t - C_y) / C_y to yesterday's PVI if today's volume is higher than yesterday's,
• adding zero otherwise

[edit] Interpretation

Fosback, in his book Stock Market Logic, claims that there is a 95% probability of a bull trend when the negative volume index is above its 1 year moving average, and drops to 50% when the NVI is below it. On the other hand, he argues there is a 67% chance of a bear trend continuing when the PVI drops below its 1 year moving average, and only 21% when it jumps back above it.

[edit] References

• Norman Fosback, Stock Market Logic