The Arms Index
, often called the "TRIN", short for TR
dex, brings in overall price AND volume information into one forecasting model in real time when the market is in session. I looked at recent weeks TRIN figures when someone asked me what, if anything, the Arms Index was telling me about market direction
. Nothing much at the moment, but I was reminded to revisit the NYSE (sym: $TRIN) and Nasdaq (sym: $TRINQ) Short Term Trading Indexes as a forecasting model for my series on key technical analysis topics.
It's useful to apply a moving average like a 10-day average, on the daily Arms Index or TRIN numbers as a 'filter' to scan for the point at which daily extremes have built up a certain momentum on a 2-week (10-day average) basis; the extreme extremes as it were.
Here's a recent chart of the S&P 500 (SPX) that also plots the daily NYSE Short Term Trading Index. The highlighted cluster of high readings or spikes, when accompanied by a similar extreme in the 10-day average, occurred during bottoms in the period shown. Used this way the TRIN model was good at pointing to holding steady in bullish positions or buying in. At tops it's more difficult to get a reliable TRIN 'sell signal'.
THE 'ARMS INDEX'/TRIN:
The Arms Index, while often called the TRIN (for TRading Index) is properly named, after the guy who invented it, Richard Arms. The Arms index brings in price AND volume to its formula and I'm always interested in that; volume being the only other input besides price 'used' in most technical analysis. Unlike the Advance Decline figures, the Short Term Trading Index includes volume as a component to its formula.
$TRIN is the ticker symbol I'm used to seeing for the Arms Index calculated for the New York Stock Exchange (NYSE) although symbols vary depending on your data provider; the symbol TRINQ ('NASTRIN' in some cases) is used for the Nasdaq short term trading index figure. The Arms Index short term trading index calculation for the NYSE the Nasdaq for any given day are fairly easy to find. (I tend to use the NYSE 'TRIN' Ticker symbol to refer to the Arms Index calculated for either the NYSE or NASDAQ market.)
The TRIN (Arms Index) is a fairly widely followed number by options and stock traders as a quick 'read' of buying/selling balance. If MORE volume is associated with declining stocks on any given day, that dayâ€™s Arms Index will be ABOVE 1.00. If more volume is associated with advancing stocks than declining stocks, TRIN will be BELOW 1.00 at the close of the trading day.
1.00 is a 'standoff' number, a more or less neutral reading. In many if not most trading days, the Arms index will not go below .75 or above 1.25. A number outside of these ranges suggests substantial buying or selling pressures. There have been on record days as extreme as a TRIN reading as low as .19 and as high at 10.00. Those were times of extreme bullishness or extreme panic selling.
My next chart is a snapshot of the Nasdaq in a prior year that shows one instance where the Arms Index was 'signaling' a possible bottom with a high 10-day average extreme and another instance of this indicator signaling a possible top with a low extreme in the (10-day) moving average.
Back to the present (as of the 12/22/10 Close) and the Arms Index is shown in my next chart of the daily Nasdaq Composite index. There was in this period, unlike the S&P chart seen above, one instance of a possible TOP forecasted (see yellow highlighted circles)just ahead of when there was of a 6/7 price slid beyond what had been seen in many weeks. A better 'signal', in terms of the move that has followed, was seen by the high level of the TRIN 10-day average when it hit upper (extreme-selling) peaks; my two level lines represent upper and lower extremes in the indicator. The upward spikes reflect sell pressure. Enough selling tends to set up rally potential, especially in a bull market such as our current one.
The Arms index indicates whether volume is flowing into advancing or declining stocks. Put another way, the index shows whether more of the total volume is advancing (up) volume or whether more of the total volume is declining (down) volume, for all stocks on either the NYSE or NASDAQ exchanges.
Extremes in the Arms Index have an inverse relationship to whether such extremes might suggest an upcoming bottom or top. An inverse relationship is one of opposing action; e.g., if interest rates go up, bond prices go down and vice versa. High Arms Index readings, well above 1.00, indicate heavy selling pressure. If this gets to certain extremes, a bottom often is next. Low Arms Index readings, at or below .75 for example, sometimes is a precursor to a top.
The Arms index is calculated over the course of the trading day, but the close tends to be of the widest interest to those following the market on an intermediate to long-term basis; consequently, the daily readings above are displayed as a (close-only) line chart. I have in the past, more when I was trading more intraday, monitored the hourly (60min) Arms Index on a HLC (high-low-close) chart during the day.
If the Arms index closes above 1.50 for the NYSE, and a bit higher for Nasdaq (e.g., 1.8) and this persists over a few or more days, it is also associated with a likelihood that the market is oversold, is perhaps near a bottom and might soon turn up. In this sense TRIN functions as a contrary indicator.
The theory of contrary opinion is the idea that if enough people are selling, it might be or soon be a time to buy; this depends on the circumstances, but when either buying or selling activity predominates, it gets overdone, hence the terms overbought or oversold of course.
Arms index readings well under 1.00 (e.g., between .75 and .5) in both the NYSE and Nasdaq markets, occurring for a number of days such as over a couple of weeks, has not been seen to be AS correlated to major market tops as is the case of a prolonged TRIN above 1.50-1.8, associated with bottoms.
I have noticed that when 10-day TRAN has fallen to between .75 and .5 for two or more weeks it has preceded a few tradable tops. However, as an indicator of a TOP, low TRIN readings such as on a 10-day moving average basis, don't as often suggest an upcoming top as do periods of a HIGH Arms Index periods suggest the market may be at or near a bottom.
Selling tends to be more of an all at once phenomena or is often concentrated in bursts of a few days.
To better define the overall selling or buying pressure, use of a moving average of the daily Arms index figure is used for analysis and projections of the longer-term market trend. A common average is for a 5-day TRIN and the 10-day TRIN; I tend to most often use a 10-day average, which reflects of course 2 weeks of market activity.
Here's another chart from my archive that highlights the INVERSE relationship of the Arms Index:
MORE ON USING THE ARMS INDEX
Richard Arms developed the index originally to spot intraday changes of trend/market direction. A swing to above or to below 1.00 is easy to understand as a signal of whether selling or buying pressure(s) predominates. Traders tend to watch for a change in Arms Index DIRECTION that is more than a brief fluctuation, as a signal of intraday trend changes. That and watching trading flows.
A bullish TRIN that's below or well-below 1.00 and which then starts to move steadily up, away from its lowest reading, indicates that selling is picking up. The TRIN or TRINQ sometimes starts a move in a new direction before a reversal or market turn becomes apparent from just watching price charts.
An Arms Index reading that falls from bearish (e.g., at 1.25-1.50 and above) and works its way to 1.00 and below, reflecting a shift in buying momentum, gives an added take and alert to what's going on with the market.
Watching for intraday extremes can be useful. An index that shows so well as the Arms Index does, extremes in PANIC selling, is another gauge as to when selling might have gotten OVERDONE (as sell offs are prone to get); for example, TRIN rockets up to 2.50-3.00 or more, showing a kind of 'panic selling' extreme where bottoms may form.
GOOD TRADING SUCCESS!