Chris, A very good trader posted this on AOL regarding TRIN.
<<A few days ago I answered a question on the TRIN, explaining why it can be
misleading at times. I mentioned that I used an alternative measurement that
generally gave more accurate readings and if I could find my notes, I would
post it.
Ta-da! Found 'em.
First, a brief review is in order. The TRIN index was developed by Richard
Arms and is also known as the Arm index. The closing TRIN value for the NYSE,
AMEX, and NASDAQ, or at least the information needed to calculate them, can be
found in most of the daily financial publications as well as from end-of-day
quote providers. The index is quite easy to calculate once the data is
obtained.
Four pieces of information must be obtained in order to calculate the TRIN
index. The formula, which is a simple ratio of two other market ratios, looks
like this:
(A/D) / (AV/DV)
where:
A = The number of advancing stocks
D = The number of declining stocks
AV = The total volume of the advancing stocks
DV = The total volume of the declining stocks.
Values between zero and 1 are bullish and values over 1 are bearish. A TRIN
value of 1 is considered neutral. The problem with this formula is that it
can mislead you into thinking the index is neutral when the actual market may
be bullish or bearish. To wit:
Day 1: 1000 issues advance, 100 decline, with 1,000,000 shares up volume and
100,000 shares down volume. TRIN = (1000/100)/(1,000,000 /100,000) = 10/10
=1.00.
Day 2: 100 issues advance, 1000 issues decline, with 100,000 shares up volume
and 1,000,000 shares down volume. TRIN = (100/1000)/(100,000/1,000,000) =
0.1/0.1 = 1.00.
On Day 1 the market was clearly bullish but the TRIN was neutral. On Day 2,
the market was clearly bearish but the TRIN was neutral.
Day 3: 1000 issues advance, 100 decline, with 1,000,000 shares up volume and
200,000 shares down volume. TRIN = (1000/100)/(1,000,000/200,000) = 10/5 =
2.00.
Day 4: 100 issues advance, 1000 decline, with 200,000 shares up volume and
1,000,000 shares down volume. TRIN = (100/1000)/(200,000/1,000,000) = 0.1 /0.2
= 0.50. A TRIN below 1 is considered bullish.
On Day 3, the market was clearly bullish the TRIN was very bearish. On Day 4,
the market was clearly bearish but the TRIN was very bullish.
See the problem?
There are two methods that can be used to minimize this flaw. One way is an
approach I've discussed previously: summing up the most recent 5 day TRIN
values and watching for a number greater than 6 (which indicates an oversold
market) or less than 4 (which indicates an overbought market). Values between
4 and 6 are considered neutral.
This method doesn't minimize the inherent flaw with the TRIN calculation but
it is unlikely that for five days in a row, the TRIN will be badly skewed by
misleading data, as in Days 1 through 4, above. This is a short-term
methodology, useful for pinpointing short-term overbought/oversold conditions
in the market. BTW, today's TRIN5 value for the NYSE is 4.54 and for the
NASDAQ, 4.88.
For longer-term views, I use a different method of calculating TRIN that
minimizes the problems inherent in the traditional formula. To wit:
(A x AV) - (D x DV)
That's only the first step. Unlike the traditional TRIN calculation, note
that this modified TRIN value may be negative! So after today's close,
calculate the modified TRIN value. Tomorrow, do the same. Next, take
tomorrow's modified TRIN and add it to today's modified TRIN. That's correct,
add them together. Each day, after market close take this summed value and
add it today's closing TRIN value. What you've created is called a summation
index, a running total, if you will. If today's modified TRIN value is
positive, add it to yesterday's summation index. If negative, subtract it
from the summation index.
Okay, last step. Once you have at least 11 days worth of the modified
summation index data, take a 10 day simple moving average of the data points.
Plot the 10 day MA as a line graph (connect the dots <g>).
This summation index has been very accurate in calling tops and bottoms in the
market, largely by diverging a day or two in advance of the market. I
interpret this summation index the old-fashioned way: watch for a trend line
breakout or breakdown.
A recent example on the NASDAQ would be on 7/22, when the summation index
broke down through an ascending trend line. The next day, 7/23, the summation
index fell further, confirming the breakdown.
In this case, there was no divergence - the NASDAQ made a high on 7/21 but
closed at the low of the day. On 7/22 the market fell lower; same thing on
7/23, the confirmation day for the summation index. Had you looked at a chart
on the NASDAQ you might have thought the market was merely indulging in some
profit taking. The summation index showed otherwise, however, as its
deterioration reflected the weakening breadth of the market.
Divergence was seen on the NYSE during this time period. On 7/7, the
summation index broke below its rising trendline. Confirmation came the next
day when it continued to fall. On 7/7, the DJIA closed at 9085 and continued
to climb, topping out on 7/20 at 9296. Meanwhile, the summation index kept
dropping, alerting us to the deterioration on the market's internals. The
rest, well.you know what the DJIA has done since then - dropped to a low of
8816 yesterday.
And there you have it! Any questions, please feel free to post them on the
board so others can see them as well. Of, if you prefer, send them via e-mail.
JOMO, FWIW.
---Dave Steckler>>
If you have any further questions you can e-mail him at DSteckler @aol.com
Jim |
