Today's Quote: “Out of clutter, find Simplicity. From discord, find Harmony. In the middle of difficulty lies Opportunity." Albert Einstein.

The Arms index, also known as the TRIN is a popular intraday market internal. It is a unique reading that gives us a look at useful information we don’t normally see. It compares the Advance-Decline Line (the number of stocks that are up on the day compared to the number of stocks that are down on the day, expressed graphically) to the volume coming into advancers versus decliners. It gives us a look at the “power” of the A-D line. Here is the formula for the TRIN:

The formula is:

	Number of Advancing Issues / Number of Declining Issues
        -------------------------------------------------------
	Volume of Advancing Issues / Volume of Declining Issues

There is a TRIN reading for the NASDAQ and one for Listed Stocks. You could make a TRIN for any group you wanted but those two numbers are commonly found in the market place. Note that the TRIN formula is ‘inverse’. High readings and uptrends in the TRIN are bearish, low readings and downtrends are bullish.

How do we use this as traders? First, as swing or core traders we don’t care about the intraday market internals. But there is a use for the TRIN as a longer term indicator. While extreme readings of the TRIN do not mean a reversal is at hand, there are historic numbers that the five and ten day moving averages of the TRIN usually reverse at.

During bullish times the TRIN will be under 1.0 most of the time. When the 10 day moving averages actually bring the TRIN to .8, it historically means we are near a high in price. When the TRIN reading brings the 10 day moving average to 1.2, it is high enough that the price is likely near a low. Naturally, like any internal reading, it is a clue to alert you when to take a price reversal seriously. You always wait for the actual price reversal.

As an intra day trader we monitor the TRIN throughout the trading day. The general rule is that a TRIN reading above 1.0 starts becoming bearish, and a TRIN reading below 1.0 starts becoming bullish. In addition to that you must monitor the trend of the TRIN. Uptrends in the TRIN are bearish, down trends in the TRIN are bullish. The trick is looking at a combination of both the actual number and the trend to arrive at a useful conclusion. Tomorrow we will look in greater detail at the long and short-term uses of the TRIN.