Using the TRIN (Arms index) by Teresa Appleton @ www.TradeWithLogic.com

A key ingredient in measuring market breadth is the Arms Index known as the TRIN.  The TRIN measures underlying supply-and-demand factors in the market.  This allows a trader to see whether buying pressure or selling pressure is controlling the market at any given time.  Comparisons of the advances and declines to the volume of trading occurring on those advances and declines it recognizes underlying pressures that are not shown in just a price study.   The study ignores unchanged stocks on the day and their volume.

The formula for the Arms Index (TRIN) is A/D/AV/DV = Arms Index.  A= number of advancing stocks, D=number of declining stocks, AV=volume of trading in those stocks that are advancing and DV=volume of those stocks that are declining.

Under .90 is considered bullish on the TRIN, .90-1.00 is considered neutral territory and over 1.00 is bearish.  The lower the number the more bullish and the higher the more bearish, this inverse relationship to the market can sometimes confuse traders.  If the TRIN is .70 that would be telling a trader that more stocks were going up than down and the stocks that are rising were doing so on heavier volume than the declining stocks.  The readings on the TRIN change throughout the day as conditions on the market change.  It is also ineffective in the first half hour as shares are getting open and trading volumes are abnormal.  The bullish side is 0-.90, neutral is .90-1.00 and the bears have the infinite range from 1.00 and beyond.  IT is very rare to close under .30 and over 3.00, still leaving a lot of range in between.

The guise of the market can come in if you were using ONLY an A/D line (advancers to decliners) and you see that more shares were pointed up or down, for this example let’s say more were up.  We have 956 Advances and 645 Decliners.  By looking at only that piece of the puzzle you would assume there is more buying pressure in the market and it is a good day because more stocks are advancing than declining by almost 1.5 to 1 ratio.  Now if we see Advancing volume outpacing declining volume that too would say the bulls are In control.  But if the TRIN is not falling that would be saying the buyers are selling stock, which accounts for the volume on the advancers looking bullish but really pulling in sellers.  So if the TRIN is not dropping on a rising market that is likely the case and the TRIN index is not confirming the higher move leaving the move very suspect.  The same is the case on a low TRIN for a bears, would mean we are seeing selling volume higher, but the declining shares are being bought possibly.  Posing a threat to the perceived bearish tone of the market and impending reversal should be watched for.

The four variables that make up the Arms index can shift perception with any skewed distortion and to understand each let us take a look.  A market can become more bullish if the number of advancing issues decrease, which seems illogical and WRONG.  But keeping human emotion in the picture if the stocks that are advancing are the heavier volume stocks that keeps the TRIN falling.  The lighter traded shares are the ones showing a decrease not the heavier traded.  The human pile in factor, trade what is moving on heavy volume scenario pushes the volume and creates the downside move on the TRIN giving a more bullish picture.

Another way to become more bullish is an increase in the number of declining issues without a similar increase in declining volume.  The stocks that are moving to the down side are light traders.  The heavier trades are to the positive side of the market.  The human factor is those stocks rising are getting the action pushing the market to even more bullish tones.  The simple and most easily identified is a move in upside volume showing buyers moving into shares and sellers on strike.  The stocks advancing with the heaviest volume keep pushing with the pile in effect and the general retail traders along with institution pour money into heavily traded shares advancing, leaving the sellers on the curb.

Using the TRIN for longer term or shorter term trading can give a trader the edge over using just a single market breadth tool, because this is combining four variables to determine market sentiment.  The psychology of the market is schizophrenic, but being able to see where supply and demand pressures are help to navigate the markets.  Seeing the actual number along with the general direction the TRIN is moving helps to identify tone changes throughout the day and keep a trader on the right side of the market.  If the TRIN is .70 in the first hour but keeps edging up as the market is moving up, there is a problem underlying and long positions need to be trailed aggressively.  The same is said for a high TRIN that is dropping, the short positions need to be kept on a tight leash and monitored for a change in direction.