Positive Volume Index | Negative Volume Index

Positive Volume Index

The Positive Volume Index was introduced by Norman Fosback and is often used in conjunction with Negative Volume Index to identify bull and bear markets.  Positive Volume Index highlights days when volume is up on the previous day. Negative Volume Index highlights days when volume is down.

 Trading Signals

Fosback maintains that there is a 67% probability of a bear market when Positive Volume Index is below its 1 year moving average. The probability drops to 21% when PVI is above the moving average.

• Positive Volume Index crossing to below its one year moving average confirms the approach of a bear market.

  Example

  Procter & Gamble with Positive Volume Index 9-day exponential moving average (fast MA) and 255-day exponential moving average (slow MA).
  
  
  
  1. Fast MA crosses to below the slow MA. Bear signal [-].
  2. Fast MA crosses back to above the slow MA. End of bear signal [+].
  Indicator smoothing (the fast MA) eliminates several whipsaws from the Positive Volume Index.

  Formula

• Take yesterday's Positive Volume Index
• If today's volume is greater than yesterday, add:
             { ( Close [today] - Close [yesterday] ) / Close [yesterday] } * PVI [yesterday]
• Otherwise, add zero.        

  

Negative Volume Index

Also The Negative Volume Index was introduced by Norman Fosback and is often used in conjunction with Positive Volume Index to identify bull markets. The two indicators are based on the assumption that the smart money dominates trading on quiet days and that the uninformed crowd dominates trading on active days.Negative Volume Index is based on days when volume is down from the previous day. Positive Volume Index is based on days when volume is up on the previous day.

 Trading Signals

Fosback maintains that there is a 95% probability of a bull market when Negative Volume Index is above its 1 year moving average. The probability drops to 50% when NVI is below the moving average.

• Negative Volume Index crossing to above its one year moving average confirms the approach of a bull market.

  Example

  Wal-Mart Stores Inc. plotted with Negative Volume Index, 9-day exponential moving average and 255 day exponential moving average (of NVI).
  
  
  
  Use the 9-day moving average crossing the 255-day MA to signal the start of a bull-trend: The Negative Volume Index itself has too many whipsaws.
• The 9-day moving average crosses to above the 255-day MA, indicating an up-trend [+].
• The trend is well on its way before the next signal [+].
• A whipsaw occurs during a strong down-trend. The signal [?] is incorrect.
• The fast MA crosses to above the slow MA [+] but the ensuing trend is not very strong.
• Another signal [+] but the rally is even weaker.

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Accumulation Distribution

Accumulation Distribution uses volume to confirm price trends or warn of weak movements that could result in a price reversal.

• Accumulation: Volume is considered to be accumulated when the day's close is higher than the previous day's closing price. Thus the term "accumulation day"
• Distribution: Volume is distributed when the day's close is lower than the previous day's closing price. Many traders use the term "distribution day"

Therefore, when a day is an accumulation day, the day's volume is added to the previous day's Accumulation Distribution Line. Similarly, when a day is a distribution day, the day's volume is subtracted from the previous day's Accumulation Distribution Line.

The main use of the Accumulation Distribution Line is to detect divergences between the price movement and volume movement. An example of the Accumulation Distribution Line is shown below in the chart.

Volume Interpretation

The basic interpretation of volume goes as follows:

• Increasing and decreasing prices are confirmed by increasing volume.
• Increasing and decreasing prices are not confirmed and warn of future trouble when volume is decreasing.

For more in-depth analysis of Volume (see: Volume).

High #1 to High #2

The Nasdaq 100 made an equal high (i.e. Double Top formation) at High #2; however, the Accumulation Distribution Line failed to make an equal high, in fact it made a lower high. On average, less volume was transacted on the move higher at High #2 than occured on the first move higher at High #1; thus, this could be interpreted as there being less strength and conviction behind the rally in the Nasdaq the second move higher. This failure of the Accumulation Distribution Line signaled a strong bearish divergence.

High #3 to High #4

Again, the Accumulation Distribution line made a lower high, even though the Nasdaq 100 this time made a higher high. This bearish divergence warned that the second move to make a higher high in price lacked conviction.

Low #1 to Low #2

The bearish divergence from Low #1 to Low #2 confirmed the later bearish divergence of High #3 to High #4. On average, more volume was occuring on down days than up days, even while the Nasdaq 100 was making higher highs and higher lows, which usually is considered a sign of strength.

In summary, the Accumulation Distribution Line is a very effective tool to confirm price action and show warnings of potential price reversals. It is important to incorporate volume into price analysis, and the Accumulation Distribution Line is one of many indicators to do just this. Other indicators that include price and volume analysis and could be considered more accurate than the Accumulation Distribution Line include the Chaikin Oscillator (see: Chaikin Oscillator), Money Flow Index (see: Money Flow Index), and Price Volume Trend indicator (see: Price Volume Trend).

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Price Volume Trend

Price Volume Trend combines percentage price change and volume to confirm the strength of price trends or through divergences, warn of weak price moves. Unlike other price-volume indicators, the Price Volume Trend takes into consideration the percentage increase or decrease in price, rather than just simply adding or subtracting volume based on whether the current price is higher than the previous day's price. How the formula is calculated is presented below:

1. On an up day, the volume is multiplied by the percentage price increase between the current close and the previous time-period's close. This value is then added to the previous day's Price Volume Trend value.
2. On a down day, the volume is multiplied by the percentage price decrease between the current close and the previous time-period's close. This value is then added to the previous day's Price Volume Trend value.

The Price Volume Trend is helpful in seeing divergences; examples of these divergences are shown below in the chart.

The Price Volume Trend indicator is usually interpreted as follows:

• Increasing price accompanied by an increasing Price Volume Trend value, confirms the price trend upward.
• Decreasing price accompanied by a decreasing Price Volume Trend value, confirms the price trend downward.
• Increasing price accompanied by a decreasing or neutral Price Volume Trend value is a divergence and is indicating that the price movement upward is weak and lacking conviction.
• Decreasing price accompanied by a increasing or neutral Price Volume Trend value is a divergence and is indicating that the price movement downward is weak and lacking conviction.

High #1 to High #2

AT&T stock made lower highs, but the Price Volume Trend indicator made higher highs. This bullish divergence warned that bulls might be taking control of the stock and shorting AT&T would not be advisable.

Since the Price Volume Trend indicator multiplies positive volume when prices close higher than the previous day's close, the Price Volume Trend indicator could be interpreted as meaning that more volume flowed into High #2 than flowed into High #1. More volume interest by buyers at High #2 signaled that the price move higher had significant strength behind it and it probably was going to continue.

Low #1 to Low #2

The stock price made higher lows, generally considered a bullish signal; the Price Volume Trend indicator confirmed this move higher when it made higher highs as well.

Price Volume Trend is a valuable technical analysis tool that combines both price and volume to confirm price action or warn of potential weakness or lack of conviction by buyers and sellers. Other similar indicators that should be investigated further are the Chaikin Oscillator (see: Chaikin Oscillator) and the Money Flow Index (see: Money Flow Index).

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Chaikin Oscillator

The Chaikin Oscillator or Volume Accumulation Oscillator consists of the difference between two exponential moving averages (usually 3 and 10-day) of the Accumulation Distribution Line indicator and is used to confirm price movement or divergences in price movement. The Chaikin Oscillator is more accurate than the On Balance Volume indicator (see: On Balance Volume).

• On Balance Volume: adds all volume for the day if the close is positive, even if the stock closed only a penny higher or subtracts all volume for the day if the stock closes lower.
• Chaikin Oscillator: factors in the closing price in relation to the highs, lows, and average price and determines the appropriate ratio of volume to be attributed to the day.

The main purpose of the Chaikin Oscillator is to confirm price trends and warn of impending price reversals. The chart below of the chart illustrates these confirmation signals and divergence signals:

High #1 to High #2

The Nasdaq 100 ETF QQQQ made higher highs, usually a bullish sign. However, the Chaikin Oscillator failed to mirror the QQQQ's advance higher and ended up making a lower low. This bearish divergence forewarned of the impending price reversal.

High #2 to High #3

The QQQQ's made a significantly lower high. The Chaikin Oscillator confirmed the QQQQ's downtrend by making a lower high as well.

Low #1 to Low #2

The Nasdaq 100 made significant lower lows, yet the Chaikin Oscillator made higher lows. This bullish divergence signaled that the previous downtrend may have ended.

The Chaikin Oscillator is a helpful volume based technical indicator that helps confirm the current price action or foreshadow future price reversals. Other technical indicators similar to the Chaikin Oscillator is the On Balance Volume indicator (see: On Balance Volume) and the Money Flow Index (see: Money Flow Index).

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