Thursday 19 October 2006

Trading Index Divergence

Trading Index (TRIN) 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?

Emini Trading Index TRIN Image

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.

Do a Google search for Trading Index (TRIN) or Emini to find out more information.

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Filed Under TRIN Indicator

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