How to Trade Using the Negative Volume Index (NVI)

Introduction to the Negative Volume Index (NVI)

The Negative Volume Index (NVI) is a technical indicator used to analyze market trends by focusing on days when trading volume decreases. It is based on the premise that smart money, or institutional investors, tends to operate during low-volume periods, while retail traders drive market activity on high-volume days. Developed by Paul Dysart in the 1930s and later popularized by Norman Fosback, the NVI is mainly applied in stock market analysis but can also be adapted for other financial markets.

Interpreting the Negative Volume Index

Rising NVI: If the NVI is increasing, it suggests that the market is being driven by smart money, indicating potential bullish trends.
Falling NVI: A declining NVI suggests that institutions might be pulling back, possibly leading to weakness or a bearish trend.
Confirming Trends: When combined with a moving average (such as a 255-day MA, as suggested by Fosback), it helps identify whether a stock is in a long-term uptrend.

Trading Strategies Using the Negative Volume Index

1. NVI with 255-Day Moving Average

Strategy Overview:

Norman Fosback suggested that when the NVI is above its 255-day moving average, it confirms a long-term bullish trend.
When the NVI falls below its 255-day moving average, it suggests a bearish trend.

How to Trade:

Buy Signal: When NVI crosses above the 255-day MA, enter long positions.
Sell Signal: When NVI drops below the 255-day MA, consider exiting long positions or taking short trades.

Example:

Suppose a stock’s NVI is at 1500, and the 255-day MA is at 1400. Since NVI is above the moving average, the trend is bullish, supporting long positions.

2. NVI with Price and Volume Confirmation

Strategy Overview:

This strategy confirms an uptrend by ensuring that prices are also rising alongside the NVI increase.

How to Trade:

Buy Signal: If the NVI is rising and price action forms higher highs while volume remains low, it confirms that institutions are accumulating.
Sell Signal: If the NVI declines and the price fails to make new highs, it signals weakness and a potential exit opportunity.

Example:

A stock’s price increases from $50 to $55, and the NVI moves from 1200 to 1250 while volume declines. This suggests a bullish continuation.

3. NVI with Relative Strength Index (RSI) for Confirmation

Strategy Overview:

Combining NVI with RSI helps traders confirm overbought or oversold conditions.

How to Trade:

Buy Signal: When the NVI rises, and RSI is between 40-50 (indicating the asset is neither overbought nor oversold), it suggests an early entry into an uptrend.
Sell Signal: If the NVI declines and RSI is over 70, it may indicate a weakening trend, leading to a potential reversal.

Example:

A stock has an NVI of 1300 (increasing), and RSI is at 45. This suggests a good entry for long trades.

4. NVI Divergence Strategy

Strategy Overview:

When price and NVI move in opposite directions, it signals a potential reversal.

How to Trade:

Bullish Divergence: If price is making lower lows while NVI is making higher lows, it suggests smart money is accumulating, signaling a possible uptrend.
Bearish Divergence: If price is making higher highs but NVI is making lower highs, it may indicate distribution and a coming downtrend.

Example:

A stock price drops from $100 to $90, but NVI rises from 1100 to 1150. This suggests institutional accumulation, making it a buy signal.

5. NVI and Moving Average Convergence Divergence (MACD) Strategy

Strategy Overview:

MACD helps confirm momentum along with NVI trends.

How to Trade:

Buy Signal: If NVI is rising and MACD forms a bullish crossover, it signals strong upward momentum.
Sell Signal: If NVI declines and MACD forms a bearish crossover, it suggests downward pressure.

Example:

A stock’s NVI moves from 1350 to 1400, and MACD’s signal line crosses above the MACD line. This confirms a bullish trend.

6. NVI with Bollinger Bands Strategy

Strategy Overview:

Bollinger Bands help identify overbought and oversold levels along with NVI.

How to Trade:

Buy Signal: If NVI rises while price touches the lower Bollinger Band, it suggests an oversold condition and potential reversal.
Sell Signal: If NVI declines while price touches the upper Bollinger Band, it suggests an overbought condition and potential reversal.

Example:

A stock’s price is at the lower Bollinger Band, and NVI rises from 1200 to 1250. This confirms a reversal signal.

Conclusion

The Negative Volume Index (NVI) is a powerful indicator for identifying trends driven by institutional investors. By combining it with moving averages, RSI, MACD, Bollinger Bands, and divergence analysis, traders can develop robust trading strategies. While NVI alone isn’t a standalone tool, when used with price action and other indicators, it helps refine entry and exit points for more effective trading decisions.