Understanding the Negative Volume Index (NVI)
The Negative Volume Index (NVI) is a technical indicator that combines volume and price data to visualize how stock prices move on days when trading volume is lower than the previous session. Essentially, it’s like the sophisticated cousin of the Positive Volume Index (PVI), zeroing in on what the “smart money” does when the crowd isn’t watching. Paul Dysart first introduced this concept in the 1930s, but it didn’t make the limelight until Norman Fosback talked it up in his book “Stock Market Logic” during the disco era of the 1970s.
How Does It Work?
Here’s the scoop: the NVI only twitches when the trading volume dips from the prior day. If today’s volume matches or exceeds yesterday’s, NVI holds its breath and doesn’t budge. Decreased volume days are where NVI shines, hypothesizing that the fewer the participants, the more impactful the big players, like institutional investors, are.
A Touch of Math
NVI’s calculation goes as follows: (Price Change Ratio) x (Previous NVI Value) = New NVI Value
Where the price change ratio equals the percentage change in price from yesterday. If this makes your head spin, don’t worry. Most modern technical analysis software can compute this faster than you can say “stock market.”
Why Should You Care?
Traders armed with NVI might spot trends that are invisible on regular, noisy days filled with the hustle and bustle of the average joe trading stocks. It highlights what the market’s movers and shakers are possibly up to when the trading floor quiets down.
Related Terms
- Positive Volume Index (PVI): Focuses on how prices move on higher-than-average volume days.
- Volume: The total number of shares or contracts traded in a security or market during a given period.
- Institutional Investors: Large organizations (like funds or insurance companies) that trade large volumes of securities.
Further Reading
- “Stock Market Logic” by Norman Fosback: Get your hands on this classic to dive deeper into both NVI and PVI.
- “Technical Analysis from A to Z” by Steven B. Achelis: Explore other technical indicators that can give you an edge in the market.
In the end, while NVI might seem like a relic from the past, its knack for following the quiet whisper of big money could still offer whispers of wisdom in today’s bustling markets. Keep your ears open and your volume down; the big shots prefer it that way.
