An acronym for TRader's INdex, the TRIN appears to be a relatively straight-forward indicator. Bullish for equities when below 1.00 and bearish above used to be the standard lore. Is it that simple, however? Do the TRIN's cutoff levels for bullish and bearish activities need to be adjusted relative to recent levels? Does the trend of the TRIN matter? Some would say no and some yes, even among the OptionInvestor writers. What do the charts say?
Before we get into the evidence on the charts, it's important to understand what TRIN measures. Developed by Richard Arms and also termed the Arms index, it's determined by the following formula:
((Advancing issues/declining issues)/(advancing volume/declining volume).
If the ratio of advancing issues to declining issues is the same as the ratio of advancing volume to declining volume, TRIN equals 1. When TRIN moves below 1, that movement indicates that the ratio of advancing issues to declining issues is less than the ratio of advancing volume to declining volume. Relatively stronger volume was flowing into the advancing issues. When TRIN climbs above 1, the ratio of advancing issues to declining issues is larger than the ratio of advancing volume to declining volume. Relatively stronger volume flowed into declining issues.
The calculation method gives credence to those who believe that a bullish-below-1.00/bearish-above-1.00 cutoff level can be utilized without looking at recent trends. However, the action from April 13-18 questions that conclusion.
15-Minute Chart of the TRIN and SPX
If bullish-above-1.00/bearish-below-1.00 doesn't appear to work in isolation, at least in this small sampling, is it the TRIN's trend that counts? A glance at the TRIN chart shows that on April 18 and 19, the TRIN's trend was nearly identical in shape, although beginning from different starting points. On April 18, the TRIN began the day under the benchmark 1.00 level and stayed there all day, with the drop through most the day emphasizing the continuing bullish fervor. On April 19, however, the TRIN began the day above the benchmark 1.00 and stayed there most of the day, with its downward trend coinciding with a sideways/sideways-up consolidation on the SPX. The day wasn't clearly bullish (in accordance with a down-trending TRIN), but the initial high TRIN reading didn't indicate undue bearishness, either, when coupled with the TRIN's downward trend.
A sideways trend in the TRIN April 13 and half of April 17 resulted in a general sideways trend in the SPX, too, although the TRIN was firmly beneath 1.00 during that period, and supposedly bullish, according to the claims of those who look only at the number. Note, however, that SPX prices did tend to move in opposition to each jot in the TRIN. A slight downward cast in the TRIN early on April 13 resulted in a bounce in equity prices, for example.
The correlation appeared less strong the afternoon of April 17, however. TRIN chopped around just above 1.00 while prices dipped. Then prices climbed toward the first strong candle on April 18 while TRIN also climbed.
Although this limited evidence is far from sufficient proof that both the trend and the empirical level of TRIN must be considered, it at least presents the possibility that both could be.
If trend is going to be important, too, is there a way to anticipate when a TRIN trend might continue or be reversed? Can TRIN approach resistance or support, just as prices do, and would that resistance or support change from day to day?
Pivot analysis springs to mind as one study to test.
Annotated 15-Minute Chart of the TRIN
In my opinion, nested Keltner channels have more relevance in helping to determine when those reversals might occur, but perhaps that's because I tend to favor this dynamic charting study, based on moving averages.
Annotated 10-Minute Chart of the TRIN
For those interested, the settings on the Keltner nested channels
This brief article can not be considered definitive proof that Keltner channels,
in conjunction with RSI, also pinpoint reversal levels in the TRIN, or that such
reversals in trend can signal increasing bearishness
or bullishness, regardless
of the empirical level of the TRIN. I hope it provides food for thought for your
own explorations, however, and some skepticism about using the number alone when
looking at TRIN.