|
Overview:
The Arms Index is a market indicator that shows the relationship between
the number of stocks that increase or decrease in price
(advancing/declining issues) and the volume associated with stocks that
increase or decrease in price (advancing/declining volume). It is
calculated by dividing the Advance/Decline Ratio by the Upside/Downside
Ratio.
The Arms Index was developed by Richard Arms in 1967. Over the years,
the index has been referred to by a number of different names. When
Barron's published the first article on the indicator in 1967, they
called it the Short-term Trading Index. It has also been known as TRIN
(an acronym for TRading INdex), MKDS, and STKS.
Interpretation:
The Arms Index is primarily a short-term trading tool. The Index shows
whether volume is flowing into advancing or declining stocks. If more
volume is associated with advancing stocks than declining stocks, the
Arms Index will be less than 1.0; if more volume is associated with
declining stocks, the Index will be greater than 1.0.
The Index is usually smoothed with a moving average. I suggest using a
4-day moving average for short-term analysis, a 21-day moving average
for intermediate-term, and a 55-day moving average for longer-term
analysis.
Normally, the Arms Index is considered bullish when it is below 1.0 and
bearish when it is above 1.0. However, the Index seems to work most
effectively as an overbought/oversold indicator. When the indicator
drops to extremely overbought levels, it is foretelling a selling
opportunity. When it rises to extremely oversold levels, a buying
opportunity is approaching.
What constitutes an "extremely" overbought or oversold level depends on
the length of the moving average used to smooth the indicator and on
market conditions. Table 5 shows typical overbought and oversold levels.
|
