The calculations for both the PVI and NVI are generated using comparisons of volume
levels from the current and previous sessions.
Using 100 as a baseline (in both the PVI and NVI), current volumes that are larger
than volumes in previous session are shown in the PVI. Calculations for the NVI
are based on the previous NVI value.
When the Current Volume Level is lower than the Previous Volume Level, the formula
is as follows:
NVI = Previous NVI Value + [((Current Closing Value – Previous Closing Value)
/ Previous Closing Value) * Previous NVI Value]
When the Current Volume Value equals the Previous Volume Value, we revert to the
NVI = Previous NVI Value
Historical research shows that the NVI has a high level of accuracy in predicting
bull markets (when the indicator is above its moving average). But we should keep
in mind that when the NVI is combined with the Positive Volume Indicator (PVI),
traders can have an edge in forecasting bear markets as well. A negative cross in
the NVI suggests a roughly 50% chance that a bear market is in its early phases.
When the PVI indicator makes the same cross, that figure jumps to above 65%. Since
trading is essentially an exercise in turning the probabilities into our favor,
we can see that a combination of indicators will enhance forecasting accuracy. Although,
it should be kept in mind that this practice will also reduce the number of trading
signals that are generated.
In summary, the NVI gives traders an objective indication of when the “smart
money” is entering the market and starting to build positions. Conversely,
times of high trading volume presents a reversal signal as the previous trend is
likely to be over-extended. Indicator readings show buy and sell signals when the
NVI crosses above or below its 255 period EMA. The NVI tends to have more predictive
accuracy in bull markets than in bear markets but when this indicator is combined
with the PVI, the odds of forecasting bear markets are significantly higher.