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Positive Volume Index Or Negative Volume Index?

05/19/00 09:12:29 AM
by Han Kim

Which one should you use? Why not both! Determining market direction by using only half the data doesn't make any sense. Use all of it to ensure the highest probability of success.

Security:   JNJ
Position:   N/A

The positive volume index (PVI) measures the trend of the stock prices for days when volume increases from previous day's volume. Conversely, negative volume index (NVI) measures the trend of the stock prices for days when volume decreases from previous day's volume.

These indicators are based on the theory that the "uninformed crowd" trades predominantly on days that the volumes are rising, whereas the "smart money" is trading on the days that the volumes are declining. So the PVI is an indicator for the trend of the uninformed crowd, and NVI is an indicator for the trend of the smart money. Below is an example of how to use PVI and NVI. When these index values are compared to their respective one-year moving averages, buy/sell signals occur.

A bar chart of Johnson & Johnson [JNJ] for the months of August 1999 through May 2000. The positive volume index and negative volume index are shown below the chart.
Graphic provided by: TradeStation.
Both indicators are calculated by comparing today's volume to the previous day's volume:

Starting with a base of 100 for PVI and NVI:
TC = Today's close
YC = Yesterday's close

If today's volume is greater than yesterday's volume:

PVI = yesterday's PVI + (((TC - YC) / YC) * yesterday's PVI)
NVI = yesterday's NVI

If today's volume is less than yesterday's volume:

NVI = yesterday's NVI + (((TC - YC) / YC) * yesterday's NVI)
PVI = yesterday's PVI

If today's volume equals yesterday's volume:

PVI = yesterday's PVI
NVI = yesterday's NVI

Even though each indicator generates its own buy/sell signals, you can improve the probability of the price moving in a given direction when both signals are in agreement. In October 1999, the PVI crossed above its moving average. During this time the NVI was also above its moving average, generating a buy signal. Then just before December, the NVI went below the moving average, giving a sell signal.

Norman Fosback, author of "Stock Market Logic", did a study comparing the PVI and NVI results with actual market performance. Fosback's study showed the high accuracy that these indicators, particuarly the NVI, had in predicting a bull market. For the years 1941 through 1975 he obtained the following results:

Trend Of PVI With Respect To PVI's Moving AverageProbability That A Bull Market Is In ProgressProbability That A Bear Market Is In Progress

Trend of NVI With Respect To NVI's Moving AverageProbability That A Bull Market Is In ProgressProbability That A Bear Market Is In Progress

In summary, when both indicators are above their moving averages, it's a buy signal and when the NVI goes below, it's a sell signal.

Han Kim Advantage Staff Writer

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