The Negative Volume Index (NVI) is a fascinating tool that links the dots between declining trading volume and changes in the price of financial instruments. Essentially, when the volume dips compared to the previous day, the NVI reflects the percentage change in price for that day.
What sets the NVI apart is that it only updates its value when today’s volume is less than yesterday’s. This is significant because price drops often coincide with shrinking volumes. Consequently, the NVI typically trends downwards during these periods.
Here’s the crux of NVI interpretation: when trading is hot and volumes are rising, it’s usually the amateurs who are driving the market, following the herd. Conversely, when volume starts to fall, it’s the savvy professionals—those making the smart money—who take the reins. Therefore, shifts in NVI (remember, it only changes when volume declines) can signal that it's time to make those strategic moves in the market.
In his insightful book, "Stock Market Logic: A Sophisticated Approach to Profits on Wall Street", author Norman Fosback reveals a compelling statistic: when the NVI for the Dow Industrials is above its one-year moving average, the market is bullish 95 times out of 100. That’s a strong indicator to keep in your toolkit!
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