Two of these indicators are known as the Positive Volume Index
(PVI) and the Negative Volume Index (NVI). Paul L. Dysart developed
both in the 1930s, but they were not well popularized until
econometrician Norman G. Fosback published Stock Market Logic
in 1976. Dysart utilized market breadth statistics to produce these
indicators but Fosback modified the indexes by employing PVI and
NVI to individual security data.
Price accumulation indicators quantify the relationship between
price and volume by accumulating price when volume changes.
When the volume increases, the price change is counted in the PVI.
PVI counts price only on the days in which the volume is higher. If
the PVI is up, then price is appreciating on rising volume. If the PVI
is down, then prices are depreciating on rising volume. Accumulating
price change on the down-volume days is known as NVI. If the NVI is
up, then price is appreciating amid declining volume. If the NVI is
down, then price is depreciating on declining volume. Here are the
equations:
When today’s volume is greater than yesterday’s volume, then PVI = Previous PVI + Sum of (Close Today – Close Yesterday) / (Close Yesterday)
When today’s volume is less than yesterday’s volume, then NVI= Previous NVI + Sum of (Close Today – Close Yesterday) / (Close Yesterday)
The logic is as follows: As institutions take long positions on individual
issues, they cannot avoid influencing the price by forcing it up as
they buy. However, these institutions can attempt to sell the stock in
the midst of an uptrend without negatively affecting the price. This is
accomplished by offering shares for sale only at the offered price, with
no discounts (for example, hitting the bid). Even so, they have no way
of hiding such operations in terms of volume. Such large operations are
identified by a rise in volume. This makes the PVI an effective indicator
for individual stock issues.
Although volume keeps large institutions from hiding their operations
in the case of individual issues, such institutions do not have
difficulty when it comes to the broad market. The broad market is big
enough for any single institution to conduct its operations without
forcing the whole market’s volume higher or lower. Thus, an
informed institution can buy into the market without significantly
affecting the broad market’s volume. In this way, NVI is a very effective
indicator for use in the broad market and in market breadth
analysis:
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In a typical birthing of a new bull market, prices should rise on
increasing volume. In this state, sellers demand higher prices, as evidenced
by rising volume accompanied by sharp price increases. On
such high-volume days, various news and events are priced into the
market. Many investors, both the informed and uninformed, want to
participate. This is evidenced by a rising PVI, which is typical in the
first phase of a secular bull market. However, because volume is
heavy, NVI is not quick to recognize this developing trend.
As the bull market matures, stock prices can continue to rise even
in the case of falling volume. Here, the PVI is not much help. How-
ever, according to price accumulation theory, this is when informed
institutional investors continue to accumulate positions in anticipation
of a continued economic turnaround. During these short-trend
reversals, institutions steadily accumulate shares. These actions are
exposed by a rising NVI in the midst of a temporary pullback in a secular
bull market pullback.
A fading bull market is characterized by increases in prices with
light volume. You can also use these indicators to identify a coming
bear market. If the PVI drops while the market climbs, the stock or
stock market is being distributed on the heavy-volume days. In this
way, the PVI’s divergence might help identify the maturing trend.
Meanwhile, because NVI counts only the down-volume days, it might
continue to track the market. However, when the market falls on
heavy volume, then the NVI turns as quickly as the market drop is
sharp. As you might conclude from this example, NVI is a better tool
for detecting the market’s major trend, while PVI might be better
suited as a leading indicator.
According to Fosback’s research, conducted from 1941 through
1975, when the PVI is trending above its one-year average, there is a
79 percent probability that the market is bullish. When the NVI
trends above its one-year moving average, 96 percent of the market
being bullish. Similarly, if the NVI trends below its one-year average,
it is bullish 47 percent of the time. However, if the PVI trends below
its one-year average, the market is bullish only 33 percent of the time.
From this we can infer that PVI is good at identifying bear markets
and that NVI is excellent at identifying a bull market trend.
This topic continues...