The Bollinger Put Volume Indicator (PVI) is a sentiment indicator that measures excessive pessimism by tracking put volume. The PVI is a contrary indicator because, when negative sentiment reaches extremes, it is usually a sign that the market is about to rally.

To calculate the PVI simply divide today's put volume by a 10-day moving average of put volume. The threshhold reading for a BUY Signal is 2.0 or greater (today's put volume is twice the 10 DMA).

Market reaction can be expected within the next few days after a spike in put volume, and, while a PVI BUY Signal often precedes a major rally, the signal should only be considered to have short-term implications.

Even though 2.0 is the accepted signal threshhold, the chart will show when put volume is higher (or lower) than normal. In addition to extreme peaks in put volume being coincident with market bottoms, you will notice that extremely low put volume often coincides with market tops. For this reason we use the OEX PVI as one component of the Decision Point Short-Term Model, which also includes a volume-based oscillator (STVO) and a breadth based oscillator (STO).

I consider the PVI to be unreliable when BUY Signals are generated on options expiration day. Much of the high put volume generated is the result of expiring puts being rolled into new positions, and not just volume generated by negative sentiment.

NOTE: The value scale on our PVI chart has been reversed so that it more logically displays when the market is overbought or oversold.

John Bollinger, who invented this fine indicator, uses the CBOE data which is an aggregate of all stock options; however, since we track the OEX for the purpose of OEX options trading, we tested it using only OEX put volume and found that it worked just as well. We track both the PVI on our Daily Market/Signal Summary Report.