Journal of Technical Analysis - Market Technicians Association

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It’s important to note when using the VPCI that volume leads or precedes price action. Unlike most indicators, the VPCI will often give indications before price
trends are clear. Thus, when a VPCI signal is given in an unclear price trend, it is best to wait until one is evident. At Point 1 in Chart 3, TM - Toyota Motor, is breaking
out of a downtrend and the VPCI confirms this breakout immediately as the VPCI rises, crossing over the VPCI smoothed and then the zero line. This is an example of
VPCI’s bullish confirmation of a price trend. Later, the VPCI begins to fall during the uptrend, suggesting complacency. By Point 2, the VPCI crosses under the VPCI
smoothed warning of a possible pause within the new uptrend. This is a classic example of a VPCI bearish contradiction. Before we reach Point 3, the VPCI makes an
interesting pattern forming a “V” bottom. This is a bullish sign, often indicating the sell off has washed out many of the sellers. Later at Point 3, the VPCI confirms the
earlier bullish “V” pattern with a bullish crossover leading to a strong bull rally.
Chart 4 The VPCI predicted the last major market pullback in May 2006
Comparing the VPCI to other Price Volume Indicators
There are many price volume indicators one could use to compare the VPCI to. However, the most acclaimed is Joe Granville’s original on-balance volume
(OBV) indicator. 9 Recognizing volume as the force behind price, Granville, created OBV by assigning up days as positive volume (measured by an up close) and then
subtracting volume on down days. OBV is price-directed volume, the accumulation of +/- volume flows based upon price direction. Granville’s original objective
with on-balance volume was to uncover hidden coils in an otherwise non-eventful, non-trending market. 10 With his OBV indicator, Joe Granville, became a renowned
market strategist. In so doing, he popularized OBV and the wisdom of using volume in securities analysis. Now, OBV is a standard application on charting software
and there are many OBV practitioners. However, few are able to interpret the indicators indications as competently as Granville.
The VPCI differs from OBV in that it calculates the proportional imbalances between price trends and volume- weighted price trends. This exposes the influence
volume has upon a price trend. Although both contain volume- derived data, they convey different information. In composition, the VPCI is not an accumulation
of history like OBV but rather a snapshot of the influence of volume upon a price trend over a specified period of time. This enables the VPCI to give faster signals
than accumulation indicators similar to an oscillator. In contrast to OBV, the VPCI’s objective is not to uncover hidden coils in trendless markets, but to evaluate the
health of existing trends.
Chart 5 VPCI / OBV comparison
Jo u r n a l of Technical Analysis • 2008 • Issue 65