Negative Volume Index (NVI)
Candlefocus EditorTo calculate the negative volume index, the current period’s volume is compared with the previous period’s volume. If the current period’s volume is lower than the previous period (or down-volume day) then the close is added to the NVI with no adjustment for the volume difference between the two periods. However, if the volume for the current period is higher than the previous period (or up-volume day) then the previous NVI is multiplied by the ratio of the volume for the current period to the volume for the previous period and that becomes the new NVI. For instance, if the NVI for the previous day is 1000 and the current day’s trading volume is higher than the previous day’s, the new NVI would be: New NVI = Previous NVI x (Volume of Current Period / Volume of Previous Period) When used in conjunction with the Positive Volume Index (PVI) to identify the direction of the overall market, the NVI can help provide investors valuable insight into the influence of institutional investors on the direction of the market. The PVI measures the up-volume days, while the NVI measures the down-volume days, so both are needed to get an accurate picture of the market sentiment.
Additionally, NVI trendlines can potentially be the best trendlines for following smart-money movements, and analyzing the NVI can help provide investors a head start when looking for possible signs of reversals in the overall market. Finally, tracking the divergence between the NVI and the underlying price of a security can be a useful tool in confirming a possible continuation or reversal of the underlying trend.
In summary, the Negative Volume Index is a powerful tool that uses volume and price data to measure the progress of institutional investors, and identify potential reversals in the overall market. It can be combined with the Positive Volume Index to give investors a better understanding of the market’s overall direction, and also used to confirm possible trends in the underlying asset.