This indicator makes a very
important assumption. It assumes that the unsophisticated investor follows
market trends thus pushing up volume as they jump in on a rising security
price. On the other hand, informed buying and selling by those "in the
know" occurs on quieter periods reflected by negative volume changes on
days of declining volume. This is an excellent bull market trend
predictor. This index simply measures the trend of prices during periods
when the volume is declining.
The
price index is only adjusted on those days during which the volume has
decreased from the previous day. If the volume did not change or was
positive, the indicator remains unchanged. If the index rises, it means
simply that the price of the security has gone up on a day that the volume
has dropped. A drop in the index indicates that the price of the security
has gone down while the volume declined. (The change in the index is
calculated as a percentage change in the price).
This
indicator can be compared to its longer period averages to reflect the
movement of smart money. If, for example current index readings are above
a six-month average, it can very well indicate an up trend for the market
or the security.
