Positive Volume Index (PVI)

DEFINITION of 'Positive Volume Index (PVI)'

Positive volume index (PVI) is an indicator used in technical analysis that provides signals for price changes based on positive increases in trading volume. A PVI can be calculated for popular market indexes to track trends in the broad market overall. It can also be used to analyze movements in individual securities.

BREAKING DOWN 'Positive Volume Index (PVI)'

PVI is typically followed in conjunction with a negative volume index (NVI) calculation. Together they are known as price accumulation volume indicators.

Development of PVI and NVI

PVI and NVI were first developed in the 1930s by Paul Dysart, who used market breadth indicators such as the advance-decline line to generate the PVI and NVI. The PVI and NVI indicators gained popularity following their inclusion in a 1976 book titled "Stock Market Logic" by Norman Fosback, who expanded their application to individual securities.

Fosback's research, which encompassed the period from 1941 to 1975, suggested that when the PVI is trending above its one-year average, the probability of the market being in a bullish phase is 79%. When the PVI is trending below its one-year average, the probability of a bear market is 67%.

Calculating PVI and NVI

Calculation of the PVI depends on how current volume compares with the previous day's trading volume. If current volume is greater than the previous day's volume, PVI = Previous PVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous PVI}. If current volume is lower than the previous day's volume, PVI is unchanged.

Calculation of the NVI includes similar variables. If current volume is less than the previous day’s volume, NVI = Previous NVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous NVI}. If current volume is higher than the previous day's volume, NVI is unchanged.

PVI and NVI Signals

Generally traders will watch both PVI and NVI indicators to get a sense of the market’s trend in terms of volume. PVI will be more volatile when volume is rising and NVI will be more volatile when volume is decreasing.

Since the primary factor of PVI is price, traders will see the PVI increasing when volume is high and prices are increasing. Adversely, the PVI will decrease when volume is high but prices are decreasing. Therefore, the PVI can be a signal for bullish and bearish trends.

Studies of PVI and NVI have also introduced the notion of following smart money trades versus market exuberance sometimes instigated by uninformed investors. Research has shown that NVI changes may be more reliable in predicting bullish and bearish trends since NVI reflects smart money trading signals which are generated by market trading activity from institutions, funds and professional traders.