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Stocks & Commodities V. 23:12 (62-65): Overhauling Market Breadth by Jacobus R. van den Brink
Stocks & Commodities V. 23:12 (62-65): Overhauling Market Breadth by Jacobus R. van den Brink
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Stocks & Commodities V. 23:12 (62-65): Overhauling Market Breadth by Jacobus R. van den Brink
A transformation of the Arms index and its components saves screen space and provides additional insight into market breadth.
Most index traders are familiar with the Arms index (TRIN), which measures the average volume per declining issue relative to the average volume per advancing issue, where comparison is made to yesterdays close:
TRIN = (DNVOL / DECL) / (UPVOL /ADVN)
where:
DNVOL = Total volume of declining issues (down volume)
DECL = Total number of declining issues (decliners)
UPVOL = Total volume of advancing issues (up volume)
ADVN = Total number of advancing issues (advancers)
The neutral value, or identity, of TRIN is not zero, but one. This is a tricky aspect of the TRIN formula, since values below one are considered bullish while values above are bearish. Consequently, the opposite of any TRIN value x is not its inverse (-x) but its reciprocal (1/x), limiting bullish values to zero and leaving bearish values unlimited. A further consequence is that the usual smoothing technique using an arithmetic average does not work with TRIN. Consider the values 0.5 and 2; in bullish/bearish terms, they are exact opposites and should therefore average to the neutral value of 1, but obviously do not. (Those traders casually programming an n-bar TRIN moving average should take notice.) To correct this, I will not adjust the averaging method, but suggest instead some fundamental TRIN enhancements and additions.
A transformation of the Arms index and its components saves screen space and provides additional insight into market breadth.
Most index traders are familiar with the Arms index (TRIN), which measures the average volume per declining issue relative to the average volume per advancing issue, where comparison is made to yesterdays close:
TRIN = (DNVOL / DECL) / (UPVOL /ADVN)
where:
DNVOL = Total volume of declining issues (down volume)
DECL = Total number of declining issues (decliners)
UPVOL = Total volume of advancing issues (up volume)
ADVN = Total number of advancing issues (advancers)
The neutral value, or identity, of TRIN is not zero, but one. This is a tricky aspect of the TRIN formula, since values below one are considered bullish while values above are bearish. Consequently, the opposite of any TRIN value x is not its inverse (-x) but its reciprocal (1/x), limiting bullish values to zero and leaving bearish values unlimited. A further consequence is that the usual smoothing technique using an arithmetic average does not work with TRIN. Consider the values 0.5 and 2; in bullish/bearish terms, they are exact opposites and should therefore average to the neutral value of 1, but obviously do not. (Those traders casually programming an n-bar TRIN moving average should take notice.) To correct this, I will not adjust the averaging method, but suggest instead some fundamental TRIN enhancements and additions.
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