Wednesday 27 September 2006

Trading Index (TRIN) Divergence

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.

Trading Index TRIN Image

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.

Do a Google search for Richard Arms, the developer of the Trading Index (TRIN), to get more information.