The Negative Volume Index (NVI) is a cumulative indicator designed to track what "smart money" is doing in the market. Developed by Paul Dysart in the 1930s and later popularized by Norman Fosback, the NVI focuses on days when volume decreases from the previous day. The theory suggests that smart money trades quietly on low-volume days, while uninformed traders dominate on high-volume days.
What is the Negative Volume Index?
The Negative Volume Index only changes on days when trading volume is lower than the previous day. When volume decreases, the NVI adjusts based on the percentage change in price. The underlying assumption is that institutional investors and informed traders prefer to accumulate or distribute positions when public attention (and volume) is low.
Smart money concept: On quiet, low-volume days, informed traders can move in and out of positions without attracting attention. The NVI attempts to capture these movements by only tracking price changes when volume declines.
How the NVI is Calculated
The Negative Volume Index calculation follows a simple rule-based approach:
NVI Calculation Rules
- If today's volume is less than yesterday's volume:
NVI = Previous NVI + (Percentage Price Change x Previous NVI) - If today's volume is greater than or equal to yesterday's volume:
NVI = Previous NVI (no change) - Starting value: Usually set to 1000
Most charting platforms display the NVI as a line that gradually rises or falls based on cumulative price changes on down-volume days.
Interpreting NVI Signals
The Negative Volume Index provides valuable insights when analyzed correctly:
NVI and Its Moving Average
The most common interpretation uses a 255-day (one year) moving average of the NVI:
- NVI above its moving average: Bullish - smart money is accumulating
- NVI below its moving average: Bearish - smart money is distributing
- NVI crossing above MA: Buy signal
- NVI crossing below MA: Sell signal
Historical Success Rate
According to Norman Fosback's research, when the NVI is above its 255-day moving average, there is a 96% probability that a bull market is in progress. When below, the probability drops to only 47%. This makes the NVI particularly useful for determining the overall market trend.
Trend Direction
The slope of the NVI line itself provides information:
- Rising NVI suggests smart money is buying on quiet days
- Falling NVI indicates smart money is selling on quiet days
- Flat NVI shows no clear accumulation or distribution
Trading Strategies with NVI
Here are practical ways to use the Negative Volume Index in your trading:
Strategy 1: Trend Identification
Use the NVI to identify the primary market trend. When NVI is above its long-term moving average, favor long positions. When below, either reduce exposure or look for short opportunities.
Example Application
Analyzing the S&P 500:
- NVI has been above its 255-day MA for 6 months
- Interpretation: Bull market likely to continue
- Action: Maintain long positions, buy pullbacks
This simple approach helps you stay on the right side of the major trend.
Strategy 2: Divergence Analysis
Look for divergences between NVI and price:
- Bullish divergence: Price makes lower lows while NVI makes higher lows - smart money accumulating despite price weakness
- Bearish divergence: Price makes higher highs while NVI makes lower highs - smart money distributing despite price strength
Strategy 3: Combining NVI with PVI
Use the Negative Volume Index alongside the Positive Volume Index for a complete picture:
- When both NVI and PVI are bullish: Strong uptrend confirmation
- When NVI is bullish but PVI is bearish: Smart money buying, public selling - potential accumulation
- When NVI is bearish but PVI is bullish: Smart money selling, public buying - potential distribution
- When both are bearish: Strong downtrend confirmation
NVI vs Other Volume Indicators
Understanding how NVI differs from other volume tools helps you use it effectively:
- On-Balance Volume (OBV): Uses all days; NVI only uses down-volume days
- Accumulation/Distribution: Focuses on closing price location; NVI focuses on volume direction
- Volume Rate of Change: Measures volume changes; NVI measures price changes on specific volume conditions
Advantages of the NVI
The Negative Volume Index offers several benefits:
- Filters market noise: Ignores high-volume emotional trading days
- Long-term perspective: Helps identify major trend changes
- Simple interpretation: Above or below moving average is easy to understand
- Contrarian insight: Shows what informed money is doing away from the crowd
Limitations to Consider
Be aware of these NVI limitations:
- Slow signals: NVI is a lagging indicator that works best for long-term analysis
- Not for day trading: Daily fluctuations are not meaningful; focus on weekly or longer timeframes
- Market-specific: Works best on major indices and liquid stocks
- Requires confirmation: Should not be used as a standalone indicator
Best Practices for Using NVI
Follow these guidelines for effective NVI analysis:
- Use a 255-day (one year) moving average for trend determination
- Focus on major indices like S&P 500 or broad market ETFs
- Combine with the Positive Volume Index for complete volume analysis
- Consider NVI signals as background context rather than precise timing tools
- Update your analysis weekly rather than daily
Track Your Volume-Based Trading
Pro Trader Dashboard helps you analyze your trading performance across different strategies. Track which indicators and approaches work best for your style.
Summary
The Negative Volume Index is a unique tool for tracking smart money activity by focusing exclusively on low-volume days. While it works best as a long-term trend indicator rather than a timing tool, NVI can provide valuable insight into whether informed investors are accumulating or distributing. Combine it with the Positive Volume Index and other technical tools for a comprehensive view of market dynamics.
Want to learn more about volume analysis? Check out our guide on Positive Volume Index (PVI) or explore On-Balance Volume (OBV).