The Arms Index , also know as the TRIN - "TRading INdex", (ticker: $TRIN) is an important volume-based confirmation indicator as well as overbought and oversold indicator. The Arms Index has four components listed below:
- Advancing Issues on the New York Stock Exchange (NYSE) - $ADV or $NYADV
- Advancing Volume on the NYSE - $UVOL or $NYUPV
- Declining Issues on the NYSE - $DECL or $NYDEC
- 4Declining Volume on the NYSE - $DVOL or $NYDNV
The formula for the Arms Index is simply:
(Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)
The intra-day 5-minute chart of the mini-Dow futures contract shows the $TRIN:
Interpreting the Arms Index
- Neutral Reading = 1
- Bearish Reading > 1
- Bullish Reading < 1
The trend of the Arms Index is usually more important than whether or not the Arms Index is above or below 1. As can be seen in the intra-day chart above, when the mini-Dow was falling in price, the Arms Index was increasing. At 1.5, a very high Arms Index reading, a trader could take a contrarian stance and buy at the 1.5 level. Of course it would be advisable to see a reverse or bottoming of the Arms Index before taking such action. Also notice that when the mini-Dow is increasing, the Arms Index is increasing as well.
The Arms Index can be used from a longer term perspective. Some traders use moving averages of the inputs into the Arms Index equation. To illustrate: (10-day Moving Average (MA) of Advancing Issues / 10-day MA of Declining Issues) / (10-day MA of Advancing Volume / 10-day MA of Declining Volume) or one could simply take the 10-day Moving Average of the $TRIN.
There are fundamental problems with the Arms Index, and these probems are discussed on the next page.
