Advance/Decline Quotes

The TRIN - also called the Arms Index - is a contrarian indicator. If the TRIN has a value greater than 1, it indicates a negative market sentiment; conversely, values below 1 denote a positive sentiment.

Table 1 below provides the data used in the following examples where we discuss and compare four hypothetical TRIN calculations.

Table 1: S&P 500 TRIN calculations based on hypothetical examples

Example 1:

In this case, the TRIN indicator has a value greater than 1. Table 1 indicates that during this particular uptrend, declining stocks were traded more actively than advancing stocks. The average volume traded per declining stock was 3K, compared to an average volume per advancing stock of 1.5K. This implies that even though the index was advancing, selling pressure in the group of declining stocks exceeded the buying pressure in the group of advancing stocks - a bearish sign.

Example 2:

In this example, the TRIN reading was below 1. During this particular uptrend, advancing stocks were traded more actively than declining issues. The average volume traded per advancing stock was 2.5K, compared to an average volume per declining stock of 1K. This means that during the uptrend, the buying pressure in the group of advancing stocks surpassed the selling pressure found among declining issues - a bullish sign.

Example 3:

In this third case, the TRIN indicator stayed below 1. This is an example where the index was in a downtrend but where advancing stocks were being traded more actively than declining stocks. The average volume traded per advancing stock was 3K, compared to an average volume per declining stock of 1.5K. Even though the index was losing ground, the buying pressure in the group of advancing stocks was greater than the selling pressure found among declining issues - a bullish sign.

Example 4:

In this last example, the TRIN indicator was above a value of 1. This is a further instance where the index is in a downtrend, but in this particular case, declining stocks were traded more actively than advancing stocks. The average volume traded per declining stock was 2.5K, compared to an average volume per advancing stock of 1K. Here, we have a situation where the index is pushing lower and the selling pressure in the group of the declining stocks was stronger than the buying pressure in the group of advancers - a bearish sign.

Conclusions:

A comparison of examples 1 and 2: In both cases, the ratio of declining and advancing issues was identical, but market sentiment in the latter case could be considered more bullish than in the former.

A comparison of examples 3 and 4: In spite of the fact that the ratio of declining and advancing issues remained the same for both cases, example 4 has more bearish implications than case 3.

Next: Advance/Decline Volume Indicators