What is Cumulative Volume Index (CVI)?
The Cumulative Volume Index (CVI) is a measure of the momentum of moving funds in and out of the entire stock market by calculating the difference between rising and falling stocks as the current sum.
- The Cumulative Volume Index (CVI) examines whether net capital flows are in and out of the stock market.
- This is a measure of momentum to explain progress / decline in the wider market.
- CVI adds the rising stock minus the falling stock to the CVI value for the previous period.
Understand Cumulative Volume Index (CVI)
The Cumulative Volume Index is a width indicator of market or index direction, such as the New York Stock Exchange or the S & P 500 Index. Its name sounds similar to the On-Balance-Volume indicator, except that CVI, like the Advance / Decline Index, looks only at the number of securities, not the volume of the securities.
When reading the CVI, it is important to note that the actual number is not important as it is not normalized (this is just the current total). Traders and investors should instead look at the trends over time in CVI relative to the price of the index and interpret its implications.
Many traders and investors do not use CVI as a stand-alone indicator, but in combination with other forms of technical analysis such as chart patterns and technical indicators. By doing so, they increase the odds of a successful transaction by looking for confirmation of trends and reversals.
How to calculate CVI
The cumulative volume index can be calculated as follows:
..CVI= =PPCVI+(((Forward stock−Inventory decrease)where:PPCVI= =CVI of the previous termForward stock= =Number of forward sharesCurrent termInventory decrease= =Number of shares decreasedCurrent term..
Use of CVI
The cumulative volume index is used to determine if capital is moving to or out of the index. If CVI is on a downward trend, traders may assume that the trend is losing momentum and a reversal is imminent. If the CVI is on an uptrend, traders may assume that the trend is gaining momentum and it may be time to trade with the trend.
At the same time, traders may look for divergence or convergence between the price and the CVI trend line. Highs and lows made at prices not reflected in CVI measurements may be a sign of a weakening trend and future corrections.
The following graph shows an example of a cumulative volume index applied to the SPDR S & P 500 ETF (NYSE ARCA: SPY) from March 2020 to March 2021.
In the graph above, you can see that CVI (indicated by the blue line in the lower panel) decreased in April 2020, but has increased steadily since then.