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The Negative Volume Index (NVI) is a technical indicator that analyzes price movements on days when trading volume decreases, assuming that "smart money" (institutional investors) is more active during these periods. It's used to identify potential trend reversals or continuations by tracking how prices behave when the general trading community's influence is lower.
The Negative Volume Index (NVI) tracks price changes on days with lower trading volume, assuming smart money moves on quieter days. It is often used with moving averages or market indices to identify trends and divergences.
The NVI was introduced by Paul L. Dysart Jr. in the 1930s, focusing on low-volume days when informed traders act. Norman Fosback later popularized it and suggested comparing the NVI with its one-year moving average to spot long-term trends.
The NVI calculation is relatively straightforward and works on a cumulative principle:
If today’s volume is less than yesterday’s:
NVI Today = NVI Yesterday + [(Price Change % of Today) × NVI Yesterday]
If today’s volume is equal to or greater than yesterday’s:
NVI Today = NVI Yesterday
Where:
Price Change % = (Today’s Closing Price – Yesterday’s Closing Price) / Yesterday’s Closing Price × 100
The initial NVI value is typically set to 1000
This calculation method ensures that NVI only changes when volume falls, thereby isolating investor behaviour during quieter sessions.
The NVI’s main strength lies in trend confirmation and divergence analysis:
When the NVI crosses above its moving average or market index, it may indicate that smart money is accumulating shares, potentially signalling a longer-term upward trend.
If the NVI falls below its moving average, especially while the market continues rising, it could point to a weakening rally or upcoming correction.
A divergence between NVI and stock price or index movement can provide early warnings of possible reversals.
The NVI is often paired with the Positive Volume Index (PVI), which tracks price movements on high-volume days. The comparison offers a dual perspective on how smart money and retail investors might be influencing the market.
Feature |
Negative Volume Index (NVI) |
Positive Volume Index (PVI) |
|---|---|---|
Volume Criteria |
Updates only on lower volume days |
Updates only on higher volume days |
Focus |
Smart money activity |
Retail investor activity |
Signal Type |
Trend confirmation and divergence |
Momentum during high participation |
If both indicators are rising, it may indicate a broad market rally. If the NVI is falling while PVI is rising, there could be underlying weakness despite surface-level optimism.
Simple to Use: Requires only volume and price data.
Helps Filter Noise: Focuses on quiet days, cutting through short-term hype.
Identifies Smart Money Trends: Highlights periods where large players might be making quiet moves.
Great for Trend Confirmation: Especially useful when paired with other indicators like moving averages or MACD.
While helpful, the NVI is not without its weaknesses:
Not Standalone: It works best when combined with other technical tools.
Lagging Nature: Like most cumulative indicators, it may lag behind actual market shifts.
Assumption-Based: The idea that smart money always trades on low-volume days isn’t foolproof.
Indian traders and investors who use technical analysis can add the NVI to their charts using platforms like TradingView or Zerodha Kite. The indicator can be applied to benchmark indices like NIFTY 50 or individual stocks, particularly those with consistent daily trading activity.
For better results, use the NVI with a 255-day Exponential Moving Average (EMA), which aligns with a one-year trading period on Indian exchanges.
Here’s how you can interpret the NVI visually:
Trend Confirmation: When NVI is rising above its EMA, the underlying trend is often considered strong.
Bearish Divergence: If prices are rising but NVI is falling, it may indicate waning momentum.
Bullish Reversal: If the NVI starts rising before price action reverses upwards, it can suggest early accumulation.
Suppose a stock is trading at ₹500 on Day 1 with a volume of 10,000 shares. On Day 2, the price rises to ₹510, but volume falls to 8,000.
Price Change % = (510 – 500)/500 = 2%
If NVI was 1000 on Day 1, then on Day 2:
NVI = 1000 + (2% of 1000) = 1000 + 20 = 1020
If on Day 3 the volume is back up to 10,000 or more, NVI remains unchanged.
The Negative Volume Index (NVI) helps identify market trends during low activity periods, highlighting smart money movements. While not as popular as other indicators, it provides valuable insights when used alongside other tools for better trading decisions.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
It helps identify how prices behave when volume decreases, highlighting smart money activity.
The NVI focuses on days with lower volume while the PVI tracks price movements on high-volume days.
No, it’s best used in combination with other indicators for a complete analysis.
NVI is more relevant for long-term trend analysis rather than short-term trades.
It is primarily used in stock markets, though it can be adapted for indices and ETFs as well.
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