ARMS INDEX (TRIN)

Introduction

The Arms Index was developed by Richard Arms in 1967. Over the years, the index has been referred to by a number of different names. When Barron's published the first article on the indicator in 1967, they called it the Short-term Trading Index. It has also been known as TRIN (an acronym for TRading INdex), MKDS, and STKS.

Arms index, is a contrarian indicator to detect overbought and oversold levels in the market. Because of its calculation method, the TRIN has an inverse relationship with the market. Generally, a rising TRIN is bearish and a falling TRIN is bullish. Sometimes you will see the scale of the TRIN inverted to reflect this inverse relationship.

Interpretation

The Arms Index is primarily a short-term trading tool. The Index shows whether volume is flowing into advancing or declining stocks. If more volume is associated with advancing stocks than declining stocks, the Arms Index will be less than 1.0; if more volume is associated with declining stocks, the Index will be greater than 1.0.

The Index is usually smoothed with a moving average. I suggest using a 4-day moving average for short-term analysis, a 21-day moving average for intermediate-term, and a 55-day moving average for longer-term analysis.

Normally, the Arms Index is considered bullish when it is below 1.0 and bearish when it is above 1.0. However, the Index seems to work most effectively as an overbought/oversold indicator. When the indicator drops to extremely overbought levels, it is foretelling a selling opportunity. When it rises to extremely oversold levels, a buying opportunity is approaching.

What constitutes an "extremely" overbought or oversold level depends on the length of the moving average used to smooth the indicator and on market conditions. Table 1 shows typical overbought and oversold levels.

Table 1
Moving Average	Overbought	Oversold
4-day	0.70	1.25
21-day	0.85	1.10
55-day	0.90	1.05

Use

A number of TRIN interpretations have evolved over the years. Richard Arms, the originator, uses the TRIN to detect extreme conditions in the market. He considers the market to be overbought when the 10-day moving average of the TRIN declines below 0.8 and oversold when it moves above 1.2. Other interpretations seek to use the direction and absolute level of the TRIN to determine bullish and bearish scenarios. In the momentum driven markets, the TRIN can remain oversold or overbought for extended periods of time.

Calculation

The purpose of the ARMS is to express the relationship of volume in advancing issues to volume in declining issues. When the market is rising we want to see more volume going into advancing issues than declining issues. When this doesn't happen, negative divergences occur. The opposite is true in declining markets. A chart of the index will display points where the market is oversold and overbought as well as divergences between the market and the TRIN.

The basic raw calculation is as follows:

Advancing Stocks / Declining Stocks
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Advancing Volume / Declining Volume

This raw calculation can be used "as is"; however, most often the daily ratio is smoothed by moving averages of varying periods.

Another way to calculate the TRIN is the "open" method, by which the ratio is calculated from a moving averages of the components rather than calculating a moving average of the daily ratio of the components. We feature the open method and use a 10-day moving average. Here is the formula for the 10-Day Open Arms:

Last 10day's Advances / Last 10 day's Declines
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Last 10 day's Advancing Volume / Last 10 day's Declining Volume

We also provide charts of the TRIN 4-day moving average (short-term), TRIN 21-day moving average (intermediate-term), and 55-day moving average (long-term).