29. Positive & 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.