This indicator is supposed to tell you what the smart investors are doing. It is based on the idea that the days when volume rises significantly are the days when the unsophisticated investors are making trades; the quiet periods being the time when the trading patterns of the more informed are discernable.

The Negative Volume Index is calculated by adding to the index the percentage change in value (of a market index or security price) only when the volume has decreased from the previous day. A rise in the indicator could be interpreted as bullish. It can be useful to overlay a long period (for example, 52-week) moving average of this indicator. A Negative Volume index above its moving average would be a bullish signal. The bearish signal would be in force while the Negative Volume Index was below its moving average. However, this indicator more reliably indicates bull than bear trends.

Since this indicator was developed for use with market indices, you would be well advised to experiment extensively with historical data before applying it to individual securities as part of a trading system.

References

Colby and Meyers (1988). The Encyclopaedia of Technical Market Indicators Dow Jones-Irwin.