The Positive Volume Index (PVI) is a technical analysis indicator for identifying market trends and their strength, as well as confirming potential price reversals, by tracking positive increases in trading volume. The indicator can be used for both individual securities and broader market indexes.
In this article, we look at how to properly calculate and trade the PVI, as well as interpret its signals.
What Is the Positive Volume Index?
When trading volume is on the rise, the PVI assumes that “casual” investors or the “uninformed crowd” are increasingly involved in the market.
However, it is important to know that the PVI isn’t a contrarian indicator. In other words, although it is designed to track the activity of casual investors, it still moves in conjunction with market prices.
The PVI is frequently used together with the Negative Volume Index. Typically, traders and analysts will monitor both the PVI and the NVI to confirm bull and bear markets as well as to identify market trends based on volume changes.
While the Positive Volume Index primarily addresses days of increased volume, assuming that the “uninformed” investors have entered the market, the NVI is tracking the “smart money” activity. That said, the PVI moves more significantly on high-volume days, while the NVI does so when the volume is down.
Historically, the PVI has delivered a solid performance when it comes to highlighting bull and bear markets. However, just like any other indicator, PVI is also not always accurate.
Calculating the Positive Volume Index
There are two main formulas for calculating the PVI, depending on the movement in the trading volume.
If the trading volume of a security has increased compared to the previous day, then the formula for calculating the PVI is:
PVI = Yesterday’s PVI + ((Close – Yesterday Close)/Yesterday Close) * Yesterday’s PVI))
In contrast, if today’s trading volume is lower than the one from yesterday, the PVI equals yesterday’s PVI. That said, there are a few key points to highlight when calculating the Positive Volume Index.
If today’s volume is greater than the previous day’s, one should use the formula provided above. Simply enter today’s and yesterday’s price data and yesterday’s PVI value. Sometimes there will be no previous PVI calculation, and in that case, traders can use the price calculation from today as yesterday’s PVI. On the other hand, if today’s trading volume is lower than yesterday, then the PVI remains unchanged.
Trading with the Positive Volume Index
The default exponential moving average (EMA) for the PVI indicator is 255 days. If the PVI is above its 1-year MA (255 days), it suggests that the crowd-following investors are optimistic. Conversely, if the PVI is below the MA, it indicates that the crowd is growing pessimistic and that a price decline is likely.
When using the PVI on trading charts, traders typically compare a 9-period MA against a 255-period MA to look for crossovers. For instance, if the PVI surges beyond the 255-day MA from below, it could indicate that a new uptrend is imminent as the PVI is above the 1-year MA.
For instance, let’s say the PVI is on a downward trajectory while the NVI is on the rise. This is usually a bullish setup, indicating that institutional and other “smart money” investors are taking over the market while the less-informed crowd is on their way out.
This represents a clear divergence between the two indicators. Confirming this trend, traders could plot a 100-day SMA to support a bullish entry.
A setup like this regularly emerges during market declines since “smart money” investors buy the dip while casuals panic and sell their holdings.
It is also important to stress that the Positive Volume Index indicator shouldn’t be used to time market action on a daily or intraday basis. While the PVI is reliable for measuring a security’s strength, it doesn’t show how high a security’s price could spike.
In addition, since the PVI is a lagging indicator, it shouldn’t be used in the technical analysis of penny stocks due to their high volatility and unpredictability.
How to Recognize Signals
The most common signal the Positive Volume Index provides is when it falls below its 1-year MA. When this happens, there is roughly a 67% chance that a bear market is underway, according to Norman Fosback, who expanded the use of PVI and NVI to individual securities.
On the other hand, if the PVI climbs above the 1-year MA from below, it typically signals positive market sentiment and hints at a potential bullish trend. A trend like this should prevail as long as the PVI stays above the 1-year MA.
However, as Mr. Fosback noted in his books, the PVI trading signals are based on probabilities. Investors and analysts generally compare the PVI against the 1-year MA to spot and confirm potential trends and price reversals, but one shouldn’t expect the indicator to be entirely accurate.
The Positive Volume Index is often compared to another popular volume-based indicator known as the On-Balance-Volume (OBV). While both the PVI and the OBV are focused on a security’s price and volume, they measure them differently. As a result, they will also provide different trading signals and information. Learn more about the OBV in our dedicated article.
Positive Volume Index and Negative Volume Index
The NVI assumes that smart money investors will trigger price movements that require less volume than the rest of the investment crowd. As a result, as opposed to the PVI, the NVI focuses more on days of declining volume and rises on days of positive price change on lower volume.
When the NVI values are greater than the 1-year MA, this is usually considered a bullish setup. Some investors prefer to discard the PVI and rely only on the NVI, while others use the two indicators in tandem.
Both PVI and NVI represent trendlines that allow investors to monitor security price changes based on volume. NVI trendlines are arguably best used for tracking market movements driven by mainstream and institutional investors. Conversely, the PVI trendlines are strongly associated with market effects involving high volume.
Like its counterpart, the calculation of the NVI is based on how trading volume has changed relative to the previous day. The indicator falls on days of negative price change on lower volume, while it remains unchanged when the volume is higher.
Using the NVI on low-volume days can provide investors with insight into how big money managers are trading.
Using Both Together
Together, the NVI and the PVI provide a complete picture of how market prices are being affected by trading volume.
Assuming that “smart money” investors are more involved on low-volume days and casuals are more active on high-volume days, investors can plot both the PVI and NVI on a chart and try to spot divergences, which serve as trading signals.
For instance, if the PVI is dropping, this means the less-informed investors are leaving the market, and this could be seen as a buying opportunity. Similarly, a rising NVI means that “smart money” investors are taking over, which could also hint at a possible buying opportunity.
While using PVI and NVI together can create crossover signals, one should keep in mind that these two indicators are primarily used for analyzing current market conditions and volume, as well as how smart money investors behave. In other words, even though it is possible, traders don’t always use PVI and NVI for making buy/sell decisions.
Conclusion
The Positive Volume Index is a technical indicator that helps spot future price movements. In layman’s terms, the PVI moves higher on days when the volume is up relative to the previous day. While it is the opposite of the Negative Volume Index, these two are often used together.
