The Negative Volume Index (NVI) and Positive Volume Index (PVI) by Norman Fosback (http://www.fosback.com) track price changes according to changes in volume. The NVI tracks closing price changes that occur on days with lower volume than yesterday, and the PVI conversely tracks those with higher volume than yesterday.
/ close | ----------- if vol < vol[prev] NVI = NVI[prev] * | close[prev] | \ 1 if vol >= vol[prev]
/ close | ----------- if vol > vol[prev] PVI = PVI[prev] * | close[prev] | \ 1 if vol <= vol[prev]
The fraction close/close[prev] means that the indexes follow percentage daily changes in the closing prices, but only changes on the selected lower or higher volume days are used. The starting point for the changes is arbitrary, only the shape of the resulting line matters. In Chart the start is 100 for the first data portion displayed.
The principle behind the NVI is that on high volume days an uninformed crowd is dominating, whereas on quieter days “smart money” is establishing positions. Fosback holds there’s a 95% probability of a bull market when the NVI rises above its one-year moving average.
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