A Note about the Cumulative Volume Index (CVI)

The Cumulative Volume Index is one of my favorite market strength indicators. This momentum indicator works by subtracting all of the volume of the declining equities from all of the equities that are gaining. The resulting positive or negative number is then added to the previous results. This indicator is very useful in determining how much strength a bullish or bearish move has behind it.

In addition, if there is a divergence in the direction of the CVI in contrast to the S&P, it often serves as a warning sign that there will be a direction change in the market. If the CVI begins to trend down while the averages are moving upwards, it is a bearish sign. If it begins to trend up while the averages are moving downwards, it is a bullish sign.

I'd like to show how useful the CVI can be by giving three real examples of it predicting a change in market direction.

This first chart shows a weekly chart of the SPY ETF (basically the S&P 500) in yellow and the CVI in red and green. The time period that is important here is June 2007 to October 2007.  You can see that the CVI made a high in June 2007 and then failed to meet that high again in October. In contrast, the S&P 500 made a new high in October. The divergence here was a strong indicator that something was wrong with the S&P's last rally. After that high, the S&P fairly rapidly fell from 1576.09 to 666.79. 

This is a daily chart of the CVI versus the SPY in April 2010. If you remember, we had a pretty nasty 15% correction in April. Once again, the CVI was warning people that were looking for the signal. On April 26th the S&P hit a new recent high of 1219.80. However, the CVI failed to make a new high. What followed was a market correction down to about 1040; completing a 100% retracement of the previous market uptrend.  Don't think however that all signals from the CVI will warn you of that big of a drop. When the divergence happens it can be for market adjustments of all sizes and it can also give you bullish signals.

Here is a daily chart for the relevant period from June 3rd to June 10th, 2010. Here the CVI made a new relative high on June 10th in comparison to June 3rd. In contrast, the S&P was lower on June 10th than it was on June 3rd. This was a bullish divergence signal. After this indicator made the signal the market moved from 1087.85 to 1131.23 (about a 4% upward move).

I hope these examples give you a good idea of how to spot divergence between the S&P 500 and the CVI. The signals don't always work, but they work often enough that if you combine them with some other indicators or fundamental data, you can have a leg up on the market. 

Please remember to always do your own research before investing. If you would prefer for an investment advisor to handle your investments decisions please feel free to contact us as panopticmc@gmail.com.