A:

Trading strategies that use the cumulative volume index (CVI) rely on its ability to gauge market breadth and momentum. In this way, it resembles other common breadth indicators, such as the on-balance volume (OBV). However, the CVI doesn't make the same sorts of advancing and declining assumptions as the OBV. Some analysts plot the CVI against a price action line or other indicators to discover possible divergences.

Major indexes, such as the Dow Jones Industrial Average and S&P 500, are the primary target of most CVI applications. In fact, the standard CVI composite uses volume from the New York Stock Exchange (NYSE), Nasdaq and the American Stock Exchange (AMEX).

CVI can be calculated by taking the total volume of advancing stocks, subtracting the total volume of declining stocks and then plotting a running total of these values on a price chart. Higher values show larger flows of money into the market, and negative values show a net outflow of money. More important than any one day's value, however, is the trend of the CVI over time.

The CVI's shape allows it to be used much like a standard price chart: trendlines can be drawn, and support and resistance levels can be identified. Other moving average indicators can be applied for crossover techniques, and some even use breadth indicators on the CVI itself.

The CVI is not a standalone instrument; like most technical tools, it is best when used in a complementary or support role, reaffirming what another indicator has suggested may be happening in the market. Because it is best used on larger indexes, the CVI does some have some limitations for short-term trading of individual securities.

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