The Cumulative Volume Index function determines the momentum of the market by calculating the cumulative difference between the volumes of the advancing and declining issues.
he Cumulative Volume Index resembles On Balance Volume, or OBV, in some respects. Both indexes were developed to demonstrate if volume is flowing into or out of the market.The CVI takes into consideration market momentum for demonstrating money flows in and out of the market and is calculated by subtracting the volume of descending stocks from the volume of growing stocks and then adding the result value to an ongoing total figure. An effective method of interpreting the Cumulative Volume Index is to watch the general trends. The CVI demonstrates if there has been more down-volume or up-volume and how long the ongoing volume trend has been remaining on market.
It’s also possible to search for increasing discrepancies between the CVI and a market index. When the market index demonstrates a new peak while the CVI doesn’t react at all, it means that the market is going to correct itself to confirm the story based on the CVI results.
It’s important to know that as the CVI as a rule starts at the zero point, the CVI numeric value is not so significant. The slope and pattern of the CVI – that’s what significant.
By showing the direction of volume flow, the CVI is very similar to OBV. The difference between the two indicators is in the actual methods of calculation. CVI uses actual up and down volume statistics while OBV generalizes the closing prices of a particular security.
CVI can be useful in determining the overall trend and its starting point. Any divergences between the CVI and the market index are indicators of a future correction.