Positive volume index (PVI)
"Index of positive volume" indicator (PVI) changes on the periods in which value of volume has increased in comparison with the previous period. In connection with that, the rise in prices is connected to increase in volumes; PVI will usually change in a direction of ascending trend.
The Positive Volume Index by Norman Fosback acts as his Negative Volume Index. They both help identifying bull and bear markets.
Initial value of PVI:
PVI0 = 1.
If the volume of the current period is more than volume of the previous one, then
PVIi = PVIi-1 + (PVIi-1 * (Pi - Pi-1) / Pi-1),
where Pi - is the price of the current period, Pi-1 - is the price of the previous period.
If the volume of the current period is less than volume of the previous period, the value of PVI of the current period is set equal to the value of PVI for the previous period:
PVIi = PVIi-1.
In interpretation of PVI it is incorporated the following explanation. In days of revival of a stock exchange when the volume grows, it means that investors "who are not aware" are acting, who the follows the influence of a crowd. On the contrary, on days when the volume is reduced in the market, professionals work and make true money (smart money). Thus, the changes of values PVI shows working of nonprofessional investors of in the market. Therefore, Positive Volume Index assumes that people, who are not aware of the situation, trade on active days.
The PVI pays attention to the days where the volume increased from the last day. The premise being that the "crowd" takes positions on days when volume grows.
Still it is important to remember that the PVI is not a contrarian indicator. Even though the PVI should demonstrate what the not-so-smart-money is doing, it is however moving in the same direction as prices are.