Monday 16 October 2006

Trading Index (TRIN) Turns

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?

Trading Index TRIN Image

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.

Do a Google search for Trading Index (TRIN) and Emini to get more information.

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