Negative Volume Index (NVI)
What it is:
A negative volume index (NVI) identifies days in which trading volume of a particular security is substantially lower than other days.
How it works (Example):
Mathematically, the NVI compares the day's volatility to its moving average:
If V < V-1, then NVI = NVI-1 + ((Px - Px-1) / Px-1)
If V > V-1, then NVI = NVI-1
Intuitively, the formula states that if the volume of a particular security today is less than it was yesterday, then the NVI is equal to yesterday's NVI plus the percentage change in the stock's closing price. If today's volume is higher than yesterday's volume, the NVI stays the same.
Why it Matters:
The key assumption behind the NVI is that changes in volume and changes in price are correlated. In particular, many traders believe that unsophisticated investors rush the market and are thus the primary force behind high-volume days. Thus, the general objective of the NVI is to highlight low-volume days on which more sophisticated investors can buy and sell without "being noticed."