What Is the Negative Volume Index (NVI)?
I'm going to explain the Negative Volume Index, or NVI, directly to you as a key technical analysis tool. It integrates volume and price to graphically demonstrate how price movements are impacted by days when trading volume is down.
Key Takeaways
You should know that the NVI combines volume and price to highlight the effects of lower-volume days on prices. Its trendlines can be your best bet for following the moves of mainstream smart money, which is typically driven by institutional investors. I recommend using NVI alongside the Positive Volume Index (PVI) to understand how volume overall shapes price action.
Understanding Negative Volume Index (NVI)
Let me walk you through how the NVI works, especially when used with the PVI. Both were developed by Paul Dysart back in the 1930s and really took off in the 1970s thanks to Norman Fosback's book 'Stock Market Logic.' These indexes create trendlines that help you see how a security's price changes under volume influences. You'll find PVI and NVI trendlines in advanced charting software like MetaStock or EquityFeedWorkstation, usually plotted below candlestick charts, much like volume bars.
The NVI trendlines stand out because they can track the smart money movements from institutional investors effectively. On the other hand, PVI trendlines capture broader high-volume market trends, which involve both smart money and noise traders. After a price drop from high-volume trading, NVI becomes particularly useful—it shows you how institutional money is positioning in a security on those low-volume days. Overall, I advise monitoring both NVI and PVI to get the full picture of volume's role in price dynamics.
NVI Calculations
Now, let's get into the calculations for NVI, which hinge on comparing one day's volume to the previous day's. The index only updates if volume decreases from the day before; if volume is higher, there's no change. When volume is lower, you calculate it this way: NVI_t = [(P_t - P_{t-1}) / P_{t-1}] × NVI_{t-1}, where NVI_t is the Negative Volume Index at time t, and P_t is the price or index level at time t.
Disclaimer
Remember, I'm presenting this information without considering your specific investment objectives, risk tolerance, or financial situation—it's not tailored advice. Investing carries risks, including potential loss of principal, so it's not suitable for everyone.
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