Negative Volume Index

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Description

The Negative Volume Index (NVI) relates a decrease in volume to the change in the security's price. When volume decreases from the previous day, the NVI is adjusted by the percentage change in the security's price.

If (V < (ref(V,-1)) then
NVI = I + (((C - ref(C,-1) / ref(C,-1)))
If (V >= ref(V,-1)) then
NVI = I

Where:

C = Today's closing price
ref(C,-1) = Yesterday's closing price
I = Yesterday's Negative Volume Index
NVI = Today's Negative Volume Index
V = Today's volume
ref(V,-1) = Yesterday's volume

The NVI is constructed so it only displays changes on days when volume decreases from the previous day. Because falling prices are usually associated with falling volume, the NVI will usually trend downward.

Interpretation

Interpretation of the NVI assumes that on days when volume increases, the crowd-following "uninformed" investors are in the market. Conversely, on days with decreased volume, the "smart money" is quietly taking positions. Thus, changes shown in the NVI (remember that the NVI changes only on lower volume days) display what the smart money is doing.

Stock Market Logic, by Norman Fosback, points out that the odds of a bull market are 95 out of 100 when the NVI of the Dow Industrials is above its one-year moving average.