PiQ's very own @Moved-Average... on Taking a Deep Breadth: The ARMS/TRIN Index

When you trade any asset, it helps to know what underlying issues are driving price changes. Traders should always have a list of questions when entering trades. Are you a buyer or seller? Is there enough volume to support a breakout/breakdown? Are you selling spikes or riding trends? Adopting a bias before trading is extremely important and market breadth can help make informed trading decisions.

In the current market environment traders are eagerly looking for signals of oversold conditions. One widely followed market breadth indicator that can help signal such conditions is the NYSE ARMS/TRIN index and should be used in conjunction with other indicators such as upside/downside volume, advance/decline and new 52-week highs/lows. The TRIN Index tracks advancing and declining stocks to their respective volume flows. When it rises the market is said to be weak and strong when it falls. A ratio of 1.00 means the market is in balance; above 1.00 indicates that more volume is moving into declining stocks; below 1.00 indicates that more volume is moving into advancing stocks.

By using the TRIN Index in conjunction with NASDAQ’s price movements, you can make several observations. In this example, there are two instances so far this year where the TRIN spiked above 2.0 and a short-term correction followed. A third spike happened just last week.

After the TRIN spiked the NASDAQ continued to decline until the TRIN Index trended below 0.60 and stayed below 1.0 for a period. Thus, there is a general three-step trend to observe:

1/ TRIN signals a correction by spiking above 2.0. NASDAQ price falls;

2/ Price confirms a reversal, and is further supported by the amount of volume; &

3/ TRIN drops below 0.60. NASDAQ finds some support.

Given the current holiday-impacted low volume markets, conditions could change very quickly. For the moment the TRIN Index is continuing to suggest that the NASDAQ will see selling pressure. If we see a significant spike lower below 1.0 in the index, supported by high volume, you could see some support build and a long position with a tight stop might be worth considering.

Like any indicator the TRIN Index isn’t going to throw off perfect signals every time, but it is useful to make practical decisions based on price as it relates to volume.