TRIN indicator caution for Friday. The Emini closed down 7.5 points at 1,384 on Thursday. We got the expected break following the last two days of profit-taking. However, the Trading Index (TRIN) formed a divergence pattern today and we need to be cautious on Friday.

Selling started almost immediately today on the Emini. The open at 1,392.50 was 1 point above yesterday’s close. We quickly made a high and then sank swiftly all day, hitting a low of 1,381.25. The Emini bounced towards the end of the day to finally close at 1,384. Range for the day was 12.5 points and volume just above average.

The professional profit-taking we had seen over the last couple of days finally led to a strong down day. 1,395 is now a major overhead resistance level for the Emini going forward. However, there was not out-and-out panic selling today.

But a positive Trading Index (TRIN) on the Emini

Check out the Emini chart above, which shows my adjusted Trading Index.  Today’s reading was +34, while the market closed below the open. Divergence patterns like these are shown with red and white dots – red dots are bullish, white dots are bearish. Although the signals don’t always work out (check out the signal at the end of October) they are more reliable when considered with other non-correlated indicators

My 3 trend oscillators are still positive:

• Trading Index (TRIN) oscillator
• My Secret #2 oscillator, based on the open and close prices
• My Secret #3 oscillator, based on Smart Money.

Normally, if we were at the beginning of a downtrend, one of these indicators might have turned down by now. They are all in overbought territory but yet to show the first sign of weakness. Altogether, I would trade very cautiously on Friday, maybe expect a bounce and review the situation after tomorrow’s Emini market action.

NASDAQ and Dow volume

On a final note, the volume traded on the NASDAQ and Dow indices were both very high today. Typically high readings like these on down days are not necessarily bearish – we’ll have to wait and see whether this was “real selling”.

More profit taking today. The Emini closed up 2.5 points at 1,391.50 on Wednesday. Everything looked pretty good today but check out the excessive volume and neutral Trading Index (TRIN) reading and you might think otherwise.

Professional selling yesterday and weak overseas markets depressed the Emini overnight. We opened down 6.5 points and below yesterday's low. The Emini immediately rallied after the open, touched yesterday's low and continued upwards — a classic Larry Williams Oops pattern. The high reached was 1,393.25, barely above yesterday's high, making the total range for today 13 points. More importantly, volume was also well above average at 1.4 million contracts traded.

All the commentary today was about a record Dow, strong stock market, etc. I don't see it that way. Yesterday was a classic profit taking day with the professionals selling out on a below average range day. Today the volume traded was very high and the market only just managed to match yesterday's high. Professionals, the smart money, typically sell on up days and high volume like this at the top of an advance is not a good sign.

Neutral Trading Index (TRIN) reading

Of particular note was the neutral Trading Index (TRIN) reading. The chart above shows Emini daily bars with my adjusted Trading Index indicator below. Check out previous articles to see how I calculate the adjusted index. Today's reading was just 4 (zero is neutral). If the reading had been negative then it would have signaled a Trading Index (TRIN) divergence pattern. These divergences are shown with white and red dots on the Emini daily bars.

However, the intermediate trend is still intact. We have had two days of profit-taking but no signal of a change in trend. For this we’d have to see a break below 1,370 or a blow-off exhaustion pattern.

Trend continuation today. The Emini closed up 5.75 points at 1,380.75 on Monday. The Trading Index (TRIN) oscillator signal we got on Friday worked out well today. Want to know more about this useful indicator?

Don’t fight the Emini trend

The Emini opened down 3.5 points at 1,371.50 and dropped briefly to 1,370.00. It then spent the rest of the day rallying, reaching a high of 1,384.50 and eventually closed at 1,380.75. Range ways high at 14.5 points and volume was above average at 1.2 million contracts.

Trend continuation today as this market powered still higher. We ended last week with a mixed bag of signals – some bullish, some bearish. But the lesson here is “don’t fight the trend” and “the trend always lasts longer than you think it will”. I'm sure at some point this market will top out and reverse but obviously today was not the day.

Crazy Emini spike overnight

Lot of talk this morning about the spike in the Emini overnight. You can't see it on a daily chart, but after the weekly open late Sunday afternoon the Emini spiked up from 1,375 to 1,398 on low volume. Obviously there were a series of stops in Globex above 1,380 that got triggered in a cascading pattern – all the way up to 1,398. Ouch!

Trading Index oscillator ahead of the pack

In previous posts I’ve talked a lot about how I use the Trading Index (TRIN) data. The chart above shows a useful TRIN oscillator that has been catching swings in this market over the last two or three months quite accurately. As usual, red dots are bullish and white dots are bearish.

Last Thursday all my trend indicators dropped into the buy zone and then this Trading Index oscillator gave a long signal on Friday. Well today, the other trend oscillators have turned and followed the Trading Index up.

TRIN indicator divergence today. The Emini closed up 1.75 points at 1,374.25 on Thursday. Another exhaustion signal today – that makes three in the last two days. But is this exhaustion confirming the trend indicators?

Dow, Dow, Dow …

The Emini opened 2 points below yesterday's close, fell 1.5 points then rallied slowly all day to hit a high of 1,375.50 and eventually closed near the highs at 1,374.25. At 6.5 points the range was rather narrow and volume was average at about 1 million contracts.

The big news today was the Dow closing above 12,000. Couldn't stop hearing about it all day – everywhere I turned there was a report about the Dow making record highs and closing above this “psychologically very important” level. All the while, the NASDAQ remained weak and in particular the Semiconductor Index (SOX), which leads even the NASDAQ, was weaker still. If you're a professional trying to organize “distribution” and exit your long positions at market highs, I don't think you could have done better than today.

Emini exhaustion mounts

So what are our exhaustion indicators now saying. The chart above shows the Emini with daily bars and the adjusted Trading Index (TRIN). I've talked before about the adjustments that I make, briefly they are:

1. Average the NYSE and NASDAQ data
2. Take the log of this average index, and
3. Invert the resulting log index.

Divergence patterns are shown when the market closes up but the adjusted Trading Index is negative and vice versa. These divergences are shown on the Emini chart with white and red dots. White dots are bearish and red dots bullish.

So today we had the third exhaustion signal in two days. On Wednesday we had Dow and NASDAQ divergence and a Larry Williams Oops pattern. Today we had Trading Index (TRIN) divergence. The only thing missing is very low volume, showing a lack of participation in a continued rally.

But Emini trend not being followed

How about the trend indicators – what are they saying? Three of my four trend indicators all started pointing down last week:

1. Trading Index (TRIN) oscillator
2. My Secret No. 2 indicator that analyses open and closing prices, and
3. My Secret No. 3 indicator that measures the “smart money”.

These trend indicators have all continued to weaken slowly and have now entered the buy zone, although they are not at very low levels yet.

Watch these critical trend line support levels

All-in-all a bit of a mixed picture. I would have expected the market to have started falling by now given the trend indicators. There is critical support at 1,370 and any close below 1,365 would be bearish.

Trading Index (TRIN) weakness today. The Emini edged up 2.5 points to 1,376.00 on Monday. However, the Trading Index oscillator turned and volume shrank. This is another sign of weakness following Friday's turn down in the Smart Money indicator. Do you know how to use the Trading Index (TRIN) data?

First let’s look at Emini volume and inter-market divergence

There are a couple of notable points to make about the Emini market today. Volume has now shrunk to very low levels, which is a pattern we frequently see when a market tops out. Last Wednesday's volume was 1.3 million contracts, 1.0 million on Thursday, 0.8 million on Friday and now 0.7 million today, Monday. Along with this fall in volume, the daily range has also contracted significantly.

The NASDAQ is also very close to highs made back in April 2006. Today the NASDAQ closed at 2368 and the high made twice in April was 2375. I don't usually use support and resistance levels made so far apart as indicators for trading, however, I find this incident noteworthy. The Dow is making record highs, the S&P has overtaken its high made back in April, but the NASDAQ has failed to do so. This is a bearish sign with professional investors pushing blue-chip stocks rather than growth stocks.

Trading Index (TRIN) data needs manipulation before giving us answers

I have written before on the Trading Index and how to use it to find turning points in the Emini. Just to recap, I make 3 adjustments to the raw data to make it easier to use:

1. Average the NYSE and NASDAQ data
2. Take the log of this average index, and
3. Invert the resulting log index.

You can build a useful oscillator by cumulating this data and then measuring the distance from a moving average. This oscillator is shown in the chart above plotted beneath daily bars of the Emini. Turns in this oscillator are shown with white and red dots on these daily bars. White dots are bearish and red dots are bullish. As you can see, today the market advanced but the Trading Index oscillator turned down from a very high reading – a bearish signal.

This is one of my favorite indicators but beware

Looking back on the Emini chart you can see how well this single indicator identifies swings in the market. Don't use this indicator alone though, combine it with other non-correlated market indicators to identify high probability market turning points.

Trading Index (TRIN) divergence today. The Emini edged up to 1,347.75 on Wednesday. However, the Trading Index showed a very different picture. Keep reading below and I'll explain what adjustments I make to the raw data and how this very useful indicator can pin-point market turning points.

Some manipulation is required to get a useful Trading Index (TRIN) indicator

Trading Index data is available for the NYSE and NASDAQ. These two sets of data don't always move in synch and so I average them to give a better picture of the overall stock market. The Trading Index is also calculated as a ratio of advancing / declining issues to advancing / declining volume. The ratio form of this index is not balanced since end-of-day readings can go as high as 3.0 and as low as 0.3, with neutral being 1. To get around this and give a more balanced looking indicator I take the Log of the index.

Lastly, I invert the index so that positive values correspond with up moves in the market and vice versa. All these adjustments are shown in the chart above with the indicator labeled Trading Index Adj.

Look for divergence between the market and the Trading Index (TRIN)

Divergence happens when the market advances but the Trading Index is negative and vice versa. Remember a market advance in this instance is when the Close is greater than the Open. These divergences are also shown in the chart above as white and red dots on the daily bars. White dots are bearish and red dots are bullish. As you can see, today the market advanced but the adjusted Trading Index was negative – a bearish signal.

This is one of my favorite indicators but beware

Looking back on the chart you can see how well this single indicator pin-points market turning points. Don't use this indicator alone though, combine it with other non-correlated market indicators to identify high probability market turning points.