Leavitt Brothers: Forget the Fundamentals

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TRIN (Arms Index)

The Arms index, or TRIN, was developed by Richard Arms in 1967 and is used to determine the strength/weakness of the market on a day-to-day basis. It takes into consideration the number of advancing and declining issues and the volume associated with those issues.

The formula is: ((advancing issues/declining issues)/(advancing volume/declining volume))

If the TRIN > 1 the market is leaning bearish with a higher number being more bearish, but an extremely high number being a possible contrarian indicator.

If the TRIN <1 the market is leaning bullish with a lower number being more bullish.

On a short term basis (for day traders only) the actual number is less important than the direction it is moving. So if the number is 1.5 but 2 hours ago it was 2.0, and it has been steadily falling, the number says the market is leaning bearish but the direction tells you the market is improving.

Extreme readings can be used as evidence the market is either overbought or sold and will likely reverse, but this is a very short term indicator that should only be used by day traders.

But again, unlike the A/D Line which is a “stand back and gauge the strength/weakness of the overall market indicator,” the TRIN - for the most part - is strictly a short-term day-to-day guideline. There is however a longer term use that presents a buy signal (but it rarely appears). See below.

Here is a typical 5-minute indraday TRIN line. Judging by the value most of the day, it's safe to say it was a weak day for the market. But the TRIN's uptrend was broken 2 hours before the close, and then another support line was broken 1 hour before the close. Let's see what happened to the S&P 500 during this day.

As expected the market opened and immediately fell; it spent a majority of the day deep in the red. But when the TRIN topped out around 12:00, the market bottomed. Then when the TRIN broke support around 14:00, the market broke resistance and started to pick up some momentum. New lows for the TRIN was mirrored by new highs for the market.

But as we stated...this is a short term day trader's indicator that should be used with the intraday A/D Line to help determine intraday activity.

The longer term indication given by the TRIN is associated with consistantly high readings. More specifically, if the TRIN closes above 2.0 for 3 consecutive days, history says the market will move up. That doesn't mean it will rally hard; it just means over time, a reading that high for 3 days has resulted in a very solid bounce. Here's an example.

In Nov '02 the TRIN closed 3 consecutive days above 2.0.

The S&P 500 proceeded to bounce 65 points over the following three weeks.

Again, this indicator rarely presents itself...maybe once or twice/year. But when it does, its accuracy is dead on.

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