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.