What Is the Cumulative Volume Index (CVI)
The cumulative volume index, or CVI, is a momentum indicator that gauges the movement of funds into and out of the entire stock market by adding the difference between advancing and declining stocks to a running total.
Understanding Cumulative Volume Index (CVI)
The cumulative volume index is a breadth indicator that shows the direction of a market or index, such as the New York Stock Exchange or S&P 500 index. While its name makes it sound similar to the On-Balance Volume indicator, the difference is that CVI only looks at the number of securities rather than looking at their volume, similar to the Advance/Decline Index.
The cumulative volume index can be calculated as follows:
CVI=Prior Period’s CVI+(Advancing Stocks−Declining Stocks)where:Advancing Stocks=Number of advancing stocks in current periodDeclining Stocks=Number of declining stocks in current period
When reading the CVI, it's important to note that the actual number doesn't matter since it's not normalized (it's just a running total). Traders and investors should instead look at the CVI's trend over time relative to the index's price to interpret its meaning.
Many traders and investors also use CVI in conjunction with other forms of technical analysis, such as chart patterns or technical indicators, rather than using it as a standalone indicator. By doing so, they increase the odds of a successful trade by looking for confirmation of trends and reversals.
Using the CVI
The cumulative volume index is used to determine whether capital is moving in or out of an index. If the CVI is trending lower, traders might assume that a trend is losing momentum and a reversal could be around the corner. If the CVI is trending higher, traders might assume that a trend is gaining momentum and it might be time to trade alongside the trend.
At the same time, traders may also look for divergences or convergences between the price and CVI trend lines. Highs and lows made in the price that aren't reflected in the CVI readings may be a sign of a weakening trend and upcoming correction.
The following chart shows an example of a cumulative volume index applied to the SPDR S&P 500 ETF (NYSE ARCA: SPY).
In the chart above, you can see that the CVI increases between December and February before moving sharply lower as the market sold off. The CVI then trended sideways in February and April before slowly trending higher in April through June.
Chart courtesy of TradingView.com.