What is the TRIN and Tick? By GreenRoomStocks.com

I have heard a number of people in our stock market chatroom at www.greenroomstocks.com asking about what the TRIN is, so here's a good explanation of it:

The TRIN (short for TRading Index) is an indicator developed by Richard J. Arms that uses the number of advancing stocks vs. the number of declining stocks, and the volume of advancing stocks vs. the volume of declining stocks to highlight bullish and bearish momentum in the market, as well as overbought and oversold points (Gives both short and long term signals).

Basically, the trin indicates whether trading volume is concentrating in advancing or declining issues. It can be calculated on a daily basis, but it is also commonly calculated on an intraday basis.

As we said the TRIN is the ratio of advancing issues to declining issues (otherwise known as the advance/decline line or McClellan Oscillator). Formula is Advancing issues/Declining divided by Advancing Volume/Declining Volume. Note, most market commentators when analyzing the markets, only refer to the A/D line or market breadth without even considering the volume part of the formula. They'll often report strong breadth but the markets pulling back, perplexed they attribute it to some unassociated force. In reality perhaps the volume side of the formula said that although breadth was strong it wasn't getting its share of volume, and this was the real reason why the market pulled back. This link gives the raw number for A/D, TRIN and NH - NL http://finance.yahoo.com/advances?u

The commonly referenced TRIN is based on the NYSE stocks, but the same indicator can be calculated for any index. TRINQ for the NASDAQ and TRINA for the AMEX.

Advancers/Decliners Advancing vol. /Declining vol. TRIN Interpretation

1000/1600 (= .63) 100M/400M (= .25) .63/.25 = 2.52 Bearish/potentially oversold; significant portion of volume is concentrated in declining issues.

1600/1000 (= 1.6) 400M/100M (= 4) 1.6/ 4 = .4 Bullish potentially overbought; significant portion of volume is concentrated in advancing issues.

1400/1400 (= 1) 200M/200M (= 1) 1/1 = 1 Neutral; the ratio of advancing volume is proportional to the ratio of advancing issues to declining issues.

2000/500 (= 4) 400M/100M (= 4) 4/4 = 1 Neutral; the ratio of advancing volume to declining volume is proportional to the ratio of advancing issues to declining issues.

1400/1400 (= 1) 100M/400M (= .25) 1/.25 = 4 Bearish/potentially oversold; advancers/decliners are balanced, but disproportional volume is flowing into decliners.

1400/1400 (= 1) 400M/100M (= 4) = .25 Bullish/potentially overbought; advancers/decliners are balanced, but disproportional volume is flowing into advancers.

1200/100 (= 1.2) 200M/300M (= .67) 1.2/.67 = 1.79 Bearish; advancers are outpacing decliners but more volume is flowing into decliners.

1000/12000 (= .83) 300M/200M (= 1.5) .83/1.5 = .55 Bullish; decliners are outpacing advancers but more volume is flowing into advancers.

TRIN, like TICK and A/D is essentially another breadth indicator. Gives us a snap shot of the market or measures market "breadth". But it can also let us know when a move is overextended and a possible trend change is nearing, in other words it has the ability to alert us to major oversold and overbought areas for longer term trading or swing trading.
It measures market breadth (A/D) and the relative volume flowing into those issues. Basically, more advancing issues (and more volume flowing into those issues) is bullish More declining issues (and more volume flowing into those issues) is bearish.

A TRIN reading of 1.0 is considered neutral because the issues ratio and the volume ratio is the same. TRIN greater than 1.0 and rapidly rising TRINs (by .3) are considered bearish, while readings less than 1.0 or rapidly falling intraday readings (by .3) are generally bullish. The term given to a rapidly rising TRIN is "bear shift", a rising shift is said to be "bull shifting" (careful how you pronounce that). The .3 zone or buffer zone is established after the distortion period ( ~ first 30 minutes of trading) in order to void out any false signals in the early trading session. A rising .3 shift from a bullish reading becomes an intraday sell or cover long signal. A falling shift of .3 from a bearish reading tells us to cover shorts and possibly an intraday buy. When the TRIN signals oversold or gives a reading greater than 2.0, it needs to fall back below the 1.7 and journey back to the 1.0 in following sessions in order to signal a long term buy signal. A "double deuce"
Or two consecutive days of readings greater than 2.0 is one of the most powerful bearish volume capitulation signals that Arms can give. Price discovery as well as fallings TRINs is necessary to confirm a buy signal.

Like wise when we see overbought readings of less than .3 there is a period of upward momentum or residual momentum which causes price to rise a little higher before turning or consolidating. Kind of like a great locomotive would do, trying to switch directions. It must apply its breaks and skid down the track a ways in order to stop and change its course. This is the same with Markets. TRIN tells us when the breaks are being applied and when to expect turning or choppiness in the market or when to start looking for reversal signals.

It is common to use a moving average 8 on the TRIN but be advised it could filter out an important spike or shift which could be an important clue. To me it would be like putting an EMA on an EKG heart reading. Too much could be lost in the smoothing.
But a moving average would validate the momentum that the TRIN is indicating. It has an inverse relationship to the market action; It rises when the market is declining and declines when the market is rising. One of ARMS interpretations is that the market is overbought when the 10 day moving average falls below .8. Overall readings of less than .3 are necessary in order to get the moving average below .8. And oversold when the average rises above 1.2, again an overall reading of greater than 2.0 must be seen first.

TRIN readings should be interpreted in the context of the prevailing market trend. For example, in bullish phases, TRIN readings may be exceptionally low and remain that way for quite a while. Accordingly, such a reading may not be the indication of an overbought market, but rather one that is exhibiting strong upside momentum.
In a strong trending market TRIN readings can be overbought or oversold for prolonged periods and is just an indication of exceptional market strength or weakness. This why one should not change sentiment until a double capitulation signal is given and the residual momentum subsides.