The Arms index (TRIN) is a technical analysis indicator that compares advancing and declining stock issues and trading volume as an indicator of overall market sentiment. It measures the relationship between market supply and demand and is used as a predictor of future price movements in the market, primarily on an intraday basis. The Arms index seeks to provide a more dynamic explanation of overall movements in the composite value of stock exchanges, such as the NYSE or NASDAQ, by analyzing the strength and breadth of these movements.
The Arms index is calculated as follows:
TRIN = (The number of advancing stocks/The number of declining stocks)/(The composite volume of advancing stocks/The composite volume of declining stocks)
An Arms index value above 1.00 is bearish, a value below 1.00 is bullish and a value of 1.00 indicates a balanced market. The farther away from 1.00 that a value is, the greater the contrast in force between buying and selling on that day. A value that that exceeds 3.00 is considered to indicate an oversold market and that bearish sentiment is too dramatic. A value that dips below 0.50 is considered to indicate an overbought market and that bullish sentiment is overheating. Traders look not only at the value of the index, but also at how it changes throughout the day. Traders look for extremes in the index value for signs that the market may soon change directions. The Arms index was invented by Richard W. Arms, Jr., in 1967. The acronym TRIN stands for TRading INdex.
TRIN is limited in its ability as a financial gauge due to the high degree of variance in the raw data it produces. In the five days ranging from July 11, 2016 to July 15, 2016, the NYSE had TRIN values of 0.80, 0.63, 1.07, 0.58 and 1.25, respectively. During this same period, the NASDAQ had TRIN values of 0.85, 0.88, 1.08, 0.65 and 1.18, respectively. These numbers highlight the day-to-day volatility of TRIN values. Traders commonly track the 10-day moving average of TRIN data, but even this measure cannot be relied upon as a particularly accurate predictor of future market movements.