It has been a long time since I have spoken about TRIN. Let’s look at the daily “TRIN”
chart (below) while I fill you in on my observations as well as the observations of its creator. In the year just past, 2013, it did not factor into trading much, especially
in the last quarter of the year. However, I suspect that we may be paying more attention to
it in the New Year (2014), so it never hurts to review its major concepts so
that the stock trader understands how this chart can help them.
also known as “the ARMS Index” named after the guy who invented it, Richard Arms. This abstract index is used by many professional traders on Wall Street, and I suspect its readings are built into many algorithms used by the robot trading programs at the big trading houses. So, it pays to understand how TRIN works and what it can mean to your trading results.
Basically, TRIN measures the amount of FEAR in the market,
and more specifically, the New York Stock Exchange. It is a combined
measure of price and volume movements, and as volume and price drop,
TRIN should rise.
Readings below 0.8 are relatively benign,
meaning the Bulls are in control. Readings between 0.8 and 1.2 generally
anticipate some concerns, but you can still have a rising market.
Readings between 1.2 and 2.5 generally occur during falling markets and
anticipate a rising amount of fear. Readings over 2.5 reflect massive
anxiety and fear but such high readings can also lead to “a
capitulation,” meaning that the stock market is poised to reverse and go
higher, if only for a short time. Mr. Arms has said the 2.5 reading is a capitulation point that works, and from my experience over a number of years, I would have to agree with him.
However, the capitulation concept is often difficult to grasp for new or inexperienced traders, but when the markets are selling off rapidly, it creates a vacuum of only sellers, and when there only a few sellers left (after a lot of carnage), the buyers can rush in to fill the vacuum and create a short squeeze.
For the BEARS, the best moments are when the TRIN
readings are between 1.2 and 2.5…ideally, if the BEARS can get two or
three days in a row of 1.2-2.5 readings, they can clean up! Sometimes,
during extreme BEAR markets (does anyone remember what a BEAR market was
like???), the capitulation reading above 2.5 may not work…in other
words, the BEARS can keep slobbering over their killings because FEAR is
so great that no one is willing to take a chance on a reversal…so in a
BEAR market, you may actually need two or three capitulation readings
(2.5+) over 5-day span before a true capitulation occurs. At the depths
of the last Bear Market which ended in March 2009, the TRIN did several
capitulation readings before it finally worked.
However, in the
present bull market, TRIN should signal capitulation once it gets over
2.5 at any point in time. Often, TRIN will trip 2.5, but capitulation
may not show up until the next morning as run-off selling the day before
keeps it from happening on the same day. At other times, TRIN will
cross 2.5 and buyers will rush in almost immediately. It is difficult to
say when the precise moment of capitulation occurs, but keep an eye out
for it once the 2.5 or higher reading occurs.
Also, use this chart in
conjunction with other charts….for example, in a bull market, the 50
day line often serves as support for the main stock indexes like the
S&P 500 or Nasdaq 100, so check to see if these indexes are near or
touching the 50 day as TRIN crosses up over 2.5…if so, that can be a
major BUY signal, though you shouldn’t bet the farm until you can
confirm this in the markets. Also consider that TRIN is often used by professionals in combination with the TICK reading. TICK measures the up-tick or down-tick in the markets. (I plan to post a blog soon with more insight on TICK.)
Also, should TRIN go below 0.55,
that can sometimes mean there is too much RISK in the market…traders
are FEARLESS in this environment, and a 0.55 reading or lower can sometimes
mean a capitulation in buying and can mark a time to begin selling or
shorting for success. However, the buy-side capitulation is NOT as
RELIABLE as the sell-side readings.
TRIN is a short-term trading tool, and should not be relied upon to call major market turning points, though it has at times done that. Yet, most traders and technicians do not have the experience level to know when TRIN is calling a major turning point, unless they are using TRIN with other factors to confirm major turn points. For our purposes, let’s consider it a short term trading tool only, meaning the effect may last only a few days at most, and often only a few hours.
Also, be aware that TRIN can produce
a false reading once in awhile, and this has to do with the balance in
the mathematical formula. These false readings are rare, but do occur,
usually on light volume days. Anyway, I suggest that traders who
don’t understand TRIN should study this, as it has been a marvelous and
precise timing tool over the years (and it can work intra-day at times
Here’s wishing you a Happy and Prosperous New Year! Happy Trading!
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