The Positive Volume Index (PVI) is a cumulative indicator that tracks price movements on days when trading volume increases from the previous day. Developed by Paul Dysart and later refined by Norman Fosback, the PVI is based on the premise that the uninformed crowd dominates on high-volume days. By tracking what happens on these days, traders can gauge crowd sentiment and potentially spot opportunities.
What is the Positive Volume Index?
The Positive Volume Index only changes on days when trading volume is higher than the previous day. When volume increases, the PVI adjusts based on the percentage change in price. The core theory suggests that when volume rises, it means the general public is actively participating in the market, driven by news, emotions, or herd behavior.
Crowd psychology insight: High-volume days typically occur when news or emotions drive the public into the market. The PVI captures these movements, helping you understand when the crowd is bullish or bearish. This can be a useful contrarian signal when combined with other analysis.
How the PVI is Calculated
The Positive Volume Index calculation follows simple rules:
PVI Calculation Rules
- If today's volume is greater than yesterday's volume:
PVI = Previous PVI + (Percentage Price Change x Previous PVI) - If today's volume is less than or equal to yesterday's volume:
PVI = Previous PVI (no change) - Starting value: Usually set to 1000
The result is a cumulative line that changes only on days when volume expands.
Interpreting PVI Signals
Understanding how to read the Positive Volume Index effectively:
PVI and Its Moving Average
Like its companion the NVI, the PVI is typically interpreted using a long-term moving average:
- PVI above its moving average: The crowd is bullish - may indicate complacency
- PVI below its moving average: The crowd is bearish - may indicate excessive pessimism
- PVI crossing above MA: Crowd sentiment turning positive
- PVI crossing below MA: Crowd sentiment turning negative
Trend Analysis
The direction of the PVI line provides information about crowd behavior:
- Rising PVI: Prices are advancing on high-volume days - crowd is buying
- Falling PVI: Prices are declining on high-volume days - crowd is selling
- Flat PVI: No clear crowd direction on high-volume days
PVI vs NVI: Understanding the Difference
The PVI and NVI (Negative Volume Index) are complementary indicators:
Key Differences
- PVI tracks: High-volume days - "crowd" or "uninformed" trading
- NVI tracks: Low-volume days - "smart money" or "informed" trading
- PVI interpretation: More useful as a sentiment/contrarian indicator
- NVI interpretation: More useful as a trend confirmation indicator
Trading Strategies with PVI
Strategy 1: Contrarian Sentiment Analysis
Use PVI to identify when crowd sentiment may be reaching extremes:
- Rapidly rising PVI at market highs may signal excessive bullishness
- Rapidly falling PVI at market lows may signal excessive bearishness
- Look for divergences between PVI and price for potential reversals
Strategy 2: Combining PVI with NVI
The most powerful use of PVI is in combination with NVI:
- Both bullish (above MAs): Strong uptrend - crowd and smart money aligned
- NVI bullish, PVI bearish: Smart money buying while crowd sells - potential accumulation
- NVI bearish, PVI bullish: Smart money selling while crowd buys - potential distribution
- Both bearish (below MAs): Strong downtrend - both groups aligned negatively
Combined Analysis Example
Market Analysis Scenario:
- S&P 500 has been rising for 6 months
- PVI is above its 255-day MA and rising steeply (crowd very bullish)
- NVI has recently crossed below its MA (smart money turning cautious)
- Interpretation: Potential distribution phase - smart money selling to enthusiastic crowd
- Action: Consider reducing exposure or tightening stops
Strategy 3: Divergence Trading
Look for divergences between PVI and price action:
- Bullish divergence: Price making lower lows while PVI makes higher lows
- Bearish divergence: Price making higher highs while PVI makes lower highs
- Divergences suggest the crowd's conviction is waning
PVI in Different Market Conditions
How to interpret PVI across various market environments:
Bull Markets
- PVI typically rises as public participation increases
- Very high PVI readings may indicate bubble conditions
- Watch for PVI to diverge negatively near market tops
Bear Markets
- PVI typically falls as panic selling occurs on high volume
- Very low PVI readings may indicate capitulation
- Watch for PVI to diverge positively near market bottoms
Sideways Markets
- PVI tends to oscillate without clear trend
- PVI signals are less reliable during consolidation
- Wait for a clear trend to emerge before relying on PVI
Best Practices for Using PVI
Follow these guidelines for effective PVI analysis:
- Use long-term moving averages: 255-day (one year) MA is standard
- Combine with NVI: Together they tell the complete volume story
- Focus on major indices: PVI works best on liquid, broad market indices
- Weekly review: PVI is a long-term indicator; daily monitoring is unnecessary
- Context matters: Always consider the broader market environment
Limitations of PVI
Be aware of these PVI limitations:
- Lagging indicator: PVI is slow to react and best for long-term analysis
- Not for short-term trading: Daily signals are not meaningful
- Crowd is not always wrong: Sometimes the crowd catches the trend early
- Requires companion indicator: Most effective when paired with NVI
Common Mistakes to Avoid
- Using PVI alone: Always combine with NVI and price analysis
- Overinterpreting short-term moves: Focus on the long-term trend
- Ignoring market context: PVI signals mean different things in different environments
- Expecting precise timing: PVI is for trend identification, not market timing
Track Your Volume Analysis
Pro Trader Dashboard helps you analyze your trading performance using different indicators and strategies. Track what works best for your approach.
Summary
The Positive Volume Index tracks price movements on high-volume days to gauge crowd sentiment. While the crowd is not always wrong, extreme PVI readings combined with divergences can signal potential market turns. For the most effective analysis, combine PVI with its companion indicator (NVI) to understand both crowd and smart money behavior. Remember that PVI is a long-term indicator best suited for identifying major trend changes rather than short-term trading signals.
Want to learn more about volume indicators? Check out our guide on Negative Volume Index (NVI) or explore On-Balance Volume (OBV).