What's up with the TRIN? That was the question being posed to Market Monitor commentators on August 5. Studying what happened that day can illustrate how we traders might employ the TRIN.

The TRIN's first print that day had been at an extreme low of 0.27. The SPX and most other indices started climbing that morning, but soon rolled over, dropping heavily. The TRIN usually moves in opposition to price movement, but not that morning. As the SPX was hitting its morning low of 994.31, well off the day's high of 1006.64, the TRIN had risen to only 0.39. Up to then, the day's high for the TRIN had been only 0.43. The TRIN wasn't so much rising as it was trending sideways.

The TRIN's actual number and lack of an upward trend were both bullish. Price action wasn't. Which should be trusted?

Newer traders might not be familiar with the TRIN, so a little background might be necessary. Richard Arms originated the TRIN indicator, a rather simple indicator to use. Like the VIX, it's a contrarian indicator, meaning that a rise in the TRIN is usually considered bearish for equities while a drop in TRIN is usually considered bullish. It is calculated by dividing the advancing issues/declining issues ratio by the advancing volume/declining volume ratio. A result of 1 is interpreted to mean that bullish and bearish forces are fairly well balanced. A result lower than 1 may mean that the volume flowing into advancing issues is strong, so that the advancing volume/declining volume ratio is greater than the advancing issues/declining issues ratio.

At one point that August 5 morning, the raw figures showed advancing NYSE issues at 1,180 and declining issues at 2,401. Advancing volume, however, was 1,919,640,485 and declining, 1,212,698,895. The advance/decline ratio calculated at 0.4915. The advancing volume/declining volume ratio calculated at 1.583. The spot TRIN could have been then calculated by dividing 0.4915 by 1.583, resulting in a spot TRIN value of 0.31. My charting service and the raw figures obtained from another service did not result in exactly equal TRIN values, but they were fairly close, at least demonstrating how TRIN works.

So, what was up? If there were fewer advancing issues than declining issues, why was advancing volume ahead of declining volume? Why was TRIN so low?

Obviously, some of those advancing issues were drawing a lot of volume. A check of a market heat map showed that financials such as JPM, WFC, USB, C, and BAC were in the green. HBAN, CIT and MI also were in the green. Among that group, CIT had already traded double its average volume (3 month) by late morning. BAC and HBAN had already traded well over half their average volume by that same time. But it may have been C, already having achieved a huge 659,959,045 volume by late morning, with its typical volume at 660,025,580, that was emblematic of the way that volume was pouring into a few gaining issues. That huge volume pouring into C and a few other equities was distorting the TRIN and driving it lower, even though some indices had rolled lower.

On that morning, the heat map showed few green blocks other than the financials. The BIX had headed up to test and slightly exceed its first morning high. Studying the TRIN and the reasons behind the abnormally low level alerted traders to keep their eyes on the financials. If financials faltered, the bounce attempt might, too, with the TRIN then climbing. If financials kept climbing, they might pull other indices, particularly the SPX, up with them.

Traders were alerted to something else, too: whatever was going on underneath the markets, propping them up, didn't seem to be broad based. It wasn't that more volume was going into a broad list of advancing issues. Rather, it seemed to be pouring into relatively few names. That might have been a signal to be particularly alert if sitting on large bullish gains.

How high would the TRIN have had to climb that day before its level would signal a possible growing bearishness for equities? Because the number 1.00 represents equally balanced forces, some traders view a below-1.00 level as bullish, no matter what the intraday trend of the TRIN. They view TRIN levels above 1.00 as bearish, no matter what the trend. However, I like to look at the trend of the TRIN, and I also like to study it using some kind of channeling system to determine a sort of spot level for a bearish or bullish indication, depending on the day's support or resistance. I use Keltner channels because that's what I prefer, but some traders might test the more familiar Bollinger bands to see if that works for them.

I'll show you what I mean.

Annotated 15-Minute Chart of the TRIN on 8/5:

The TRIN could not produce consistent 15-minute closes above that 9-ema on that day, although it did pop above it a time or two. Traders alerted to watch the financials for guidance would have noted that the BIX and BKX continued to climb all through that day. If financials were indeed propping up the markets, they continued to do so that day and for several days afterwards.

For example, a similar situation occurred on August 10. Major indices again appeared weak and then began an afternoon drop but TRIN stayed abnormally low. Volume was once again pouring into a few gaining issues rather than into a broad number of gaining issues. FRE and C comprised two of those few issues. At one point in the middle of the afternoon, up volume was 393 million more than down volume on the NYSE, but those two issues alone had traded more 811 million shares more than their average daily volume. If not for those two issues, up volume would have been lower than down volume and the TRIN would have been higher, corroborating the downturn that began that afternoon. TRIN again alerted traders that if gains were lost in a few gaining issues, the market might be even weaker than it had appeared that afternoon. From August 5-August 10, divergences in price action and TRIN values on some days hinted that markets might be being propped up by volume pouring into a few advancing issues. By midmorning on August 10, indices started a downward slide that took them into Tuesday's low.

I try to simplify the studies I use these days, but the TRIN indicator is one that I want to corroborate the price action. It's particularly useful because the TRIN isn't based only on price action. It's based on both price (advancing or declining) and volume considerations. As I've discussed in other articles, there is no direct correlation between price and volume. Securities can gain on low or high volume, and lose on low or high volume. They can go sideways on either. That means that the TRIN's level is calculated using non-correlating variables. When we study price-based indicators such as stochastics, we're getting a study based just on price action. While such studies can be helpful, they're directly correlated to the price itself and don't give us independent corroboration or divergence information.

I don't use the TRIN as a trading signal, but I do use it in the manner I've demonstrated. Arms, however, studied TRIN on daily rather than intraday charts. He reportedly used a 10-day moving average of the TRIN. When that 10-day moving average moved below 0.8, he considered the markets overbought, and when it moved above 1.2, oversold.

On July 10, the TRIN's 10-day moving average had driven above 1.20, to close the day at 2.08, alerting bears that the markets were oversold by this measure. It was time for bears to consider cinching up stops or locking in full or partial profits. The SPX was to zoom another 20.37 points over the next three days, into the 8/04 intraday high.

The morning of August 5, the TRIN's 10-day simple moving average was at 0.877, and still moving down sharply in a downtrend that had begun on July 30. It was nearing Arm's levels that signaled overbought markets, so those in bullish trades might have been alerted to consider locking in profits or inching up their stops beneath their bullish trades. On August 10, TRIN closely approached Arm's 0.80 level before turning up again.

Just as with the spot or intraday values of the TRIN, though, I would not use the TRIN's 10-day sma as a trade signal. I would watch it as a guide to when stops need to be tightened or partial profits considered. Traders might similarly use spot intraday TRIN values to discover all-ducks-in-a-row corroboration of price action or divergence from that price action. A heat map from one's brokerage or another source might then help pinpoint whether the divergence is due to a broad-based action or action in only a few stocks or sectors. Those stocks or sectors can then be watched for further guidance. While TRIN is not a market-timing tool nor a trade signal, in my opinion, it certainly can help traders pinpoint what's going on underneath the markets and then make appropriate plans.