Transforming The Arms Index
Overhauling Market Breadth
by Jacobus R. van den Brink
A transformation of the Arms index and its components saves screen space and provides additional insight into market breadth.
Most index traders are familiar with the
Arms index (TRIN), which measures the average volume per declining issue
relative to the average volume per advancing issue, where comparison is
made to yesterday's close:
where:
Dnvol = Total volume of declining issues
("down volume")
Decl = Total number of declining issues ("decliners")
Upvol = Total volume of advancing issues
("up volume")
Advn = Total number of advancing issues
("advancers")
The neutral value, or identity, of TRIN is not zero, but one. This
is a tricky aspect of the TRIN formula, since values below one are considered
bullish while values above are bearish. Consequently, the opposite of any
TRIN value x is not its inverse (-x) but its reciprocal (1/x), limiting
bullish values to zero and leaving bearish values unlimited. A further
consequence is that the usual smoothing technique using an arithmetic average
does not work with TRIN. Consider the values 0.5 and 2; in bullish/bearish
terms, they are exact opposites and should therefore average to the neutral
value of 1, but obviously do not. (Those traders casually programming an
n-bar TRIN moving average should take notice.) To correct this, I will
not adjust the averaging method, but suggest instead some fundamental TRIN
enhancements and additions.
...Continued in the December issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
Return to December 2005 Contents