NASDAQ TRIN 10-DAY MOVING AVERAGE

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APPLICABLE TIME FRAME(S):  

SHORT / INTERMEDIATE

UPDATE SCHEDULE:

Each weekday night by 7:00 PM EST

EXPLANATION:

The TRIN (TRading INdex) was developed by technician Richard Arms, and has become a staple of almost all technicians' cadre of indicators.  Simply enough, the index is calculated as follows:

(advancing issues / declining issues) / (up volume / down volume)

For example, say we have 1500 issues which closed a given day higher and there was a total of 1.2 billion shares traded in those issues.  Also, there were 700 issues which closed lower on a total of 500 million shares.  The TRIN would be:

TRIN = (1500 / 700) / (1,200,000,000 / 500,000,000) = 2.14 / 2.40 = .89

A reading of 1.0 typically shows that there is even pressure between buying and selling.  As selling pressure increases, the TRIN increases.  As buying pressure takes over, the TRIN drops.  Therefore, one usually sees very high readings near market lows and extended bouts of low readings near market peaks.

There have been many interpretations and twists on the TRIN over the years.  We have found that using the 10-day average of daily TRIN readings, within the context of relative trading bands, provides a very effective counter-trend indication of probable turning points.

GUIDELINES:

We have found that the TRIN is most effective when giving counter-trend signals - for example, overbought in the context of a longer-term downtrend, or oversold within an uptrend.  Like most contrary indicators, oversold readings during a declining market can continue to become more oversold as the trend persists. 

Generally, however, readings which exceed one of the green or red bands on the chart (1 and 2 standard deviations from the recent mean) can be considered extreme and indicate that the trend may be becoming exhausted.

The chart below shows three occurrences of the Nasdaq TRIN reaching extremes.  In November 2002, the markets were rallying off the October low.  However, the buying pressure began to get "used up" by late November, as the 10-day TRIN exceeded its lower trading band.  Within the context of a longer-term downtrend, this was a good signal that the rally had probably seen its best days.  That was in fact the case as the decline resumed soon afterward. 

However, by late December the TRIN had reached (but not quite exceeded) its upper trading band, and the January 2003 rally immediately followed.  This was not necessarily a good buy signal, since oversold within a downtrend is not an especially high-odds trade.  In any event, the market rallied enough in the first days of January to deplete the buying pressure, as the TRIN once again poked beneath the lower trading band.  The severe selloff which followed would not have been a surprise to those who have witnessed the accuracy of these counter-tend TRIN signals.

Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS peaks when the TRIN is low, or troughs immediately after the TRIN exceeds it upper band.  It is a guideline and not a trading system unto itself.

Note: the following statistics are for the 10-day moving average of the Nasdaq TRIN, and not the daily closing TRIN value.

STATS:

*Standard Deviation.  See below...

68% of readings (1 standard deviation) should be between .93 and 1.69

95% of readings (2 standard deviations) should be between .55 and 2.07

99% of readings (3 standard deviations) should be between .17 and 2.45

In other words, we should expect a reading under .55 or over 2.07 approximately 13 times per year.  Since such a reading would be relatively unusual, it suggests that we may be seeing an unsustainable trend.  These figures assume a normal distribution curve.

ADDITIONAL RESOURCES:

NASDAQ (www.nasdaq.com)

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