Note: TRIN arms index belong to the group of Breadth indicators (indicators based on the Advance-Decline data) and could be used with indexes, exchanges, portfolios or only basket of stocks. Due to the nature of the Advance Decline data it cannot be applied to a single security, stock, ETF...
Richard Arms developed the TRIN indicator (which is also known as the ARMS indicator and TRIN Arms Index) in the 1970s. The TRIN indicator is calculated by dividing the Advances/Declines (AD) Issues Ratio by the AD Volume Ratio.
At the current moment we are the only source who provides TRIN for U.S. indexes and exchanges on intraday index charts which allows to use it in the S&P 500, NASDAQ 100, Russell 2000 and other indexes technical analysis and market timing.
The TRIN was developed as a contrarian (also known in technical analysis as inverse indicator) indicator with the intent of pinpointing the critical levels at which a market becomes overbought or oversold. Generally in technical analysis, a rising TRIN indicates bearish sentiment and a falling TRIN indicates bullish sentiment. The TRIN indicator may be applied to any index or basket of stocks. Some sources refer to the TRIN indicator applied to the New York Stock Exchange (NYSE) as the "NYSE Short Term Trading Index".
Technical analysis based on the TRIN indicator have evolved over the years. Richard Arms original concept was to use the TRIN as an indicator for detecting critical market levels. He assumed that a market was overbought when the 10-day moving average of the TRIN declined below 0.8. Conversely, he considered a market oversold when this moving average rose above 1.2.
The TRIN indicator oscillates around 1 (one) and readings greater than 1 are considered bearish while readings between 0 (zero) and 1 (one) are considered bullish. When analyzing the TRIN Arms Index it could be recommended to keep an eye on the number of advance-decline issues and advance-decline volumes. It is nice to know these number because the same TRIN values could be a result of different combinations of advance/decline issues and volumes numbers, respectfully there could be different interpretation.
As an hypothetical example, lets say on one day (see example #1 in the summary table below), the S&P 500 index had 400 advancing and 100 declining stocks. As a rule, bigger number of advancing stocks could be seen during an up-move. On the same day, volume in the group of advancing stocks was 600 M and volume in the group of declining stocks was 300 M (millions). For that day the TRIN indicator will be equal (400/100) / (600/300) = 2
Let's say on another day (see example #2 in the summary table below), the S&P 500 had 400 declining stocks and 100 advancing stocks which could during an index decline. However on that day, the volume in the group of declining stocks 1600 M and volume in the group of advancing stocks was only 200 M. In this case the TRIN indicator will be equal 2 (two) as well: (100/400) / (200/1600) = 2
In both examples above we have TRIN reading equal 2 (which is bearish sign), however in the first example we had it during an up-move and it could be interpreted as:
"Despite the fact of the index's advance and that we have more advancing stocks in the S&P 500 index, the declining stocks are traded more actively - we have 1.5 millions shares traded per advancing stock and 3 millions shares traded per declining stocks. This could suggest that more traders are coming to trade declining stocks and this is a bearish sign."
Bear in mind that in this example high TRIN readings do not suggest that the S&P 500 index is oversold as index is moving up, but, the high readings rather suggest that traders are switching their attention from advancing stocks toward declining stocks.
In the second example, we have the same high TRIN readings (TRIN = 2), but we have them during an index's down move. In this case TRIN's interpretation would be completely different:
"We have more declining stocks in the S&P 500 index and declining stocks are traded more actively - we have 4 millions shares traded per declining stock and only 2 millions shares traded per advancing stock. This may suggest panic selling in the group of declining stocks which could be a suggestion of the S&P 500 index moving into oversold an condition"
In the table below you may see details of these both examples:
S&P 500 moves up
S&P 500 declines
|Advancing Volume||600 M||200 M|
|Declining Volume||300 M||1600 M|
|Average volume per Advancing Stock||1.5 M||2 M|
|Average Volume per declining Stock||3 M||4 M|
Despite the fact of the index's advance and that we have more advancing stocks in the S&P 500 index, the declining stocks are traded more actively - we have 1.5 millions shares traded per advancing stock and 3 millions shares traded per declining stock. This could suggest that more traders are coming to trade declining stocks and this is bearish sign.
We have more declining stocks in the S&P 500 index and declining stocks are traded more actively - we have 4 millions shares traded per declining stock and only 2 millions shares traded per advancing stock. This may suggest panic selling in the group of declining stocks which could be a suggestion of the S&P 500 index moving into an oversold condition.
As you may see, may see from the table above, in different situation, depending whether index is an up-move or in a decline, the TRIN indicator readings could be explained differently from the technical analysis prospective (Click HERE to see more examples on TRIN interpretation).
On the S&P 500 chart below you may see an example of TRIN with 20-bar period setting.
Chart 1: S&P 500 and the TRIN Arms Index on the daily chart (1 bar = 1 day)
The formula for the TRIN indicator (or TRIN) is simple:
TRIN = (AD Issues Ratio)/(AD Volume Ratio)
Or to put it more specifically:
TRIN = ((Advancing issues/declining issues) / (advancing volume/declining volume))
In most case simple moving average (SMA) is applied to TRIN values to smooth it:
TRIN = SMA[(AD Issues Ratio)/(AD Volume Ratio), n]
Where n is bar period of SMA.