# Arms Index

## Introduction

Also known as the TRIN or Short-Term TRading INdex, the Arms Index is a breadth indicator developed by Richard W. Arms in 1967. The index is calculated by dividing the AD Ratio by the AD Volume Ratio. Typically, these breadth statistics are derived from NYSE or Nasdaq data, but the Arms Index can be calculated using breadth statistics from other indices such as the S&P 500 or Nasdaq 100. Because it acts as an oscillator, the indicator is often used to identify short-term overbought and oversold situations. A moving average can also be applied to smooth the data. The terms Arms Index and TRIN are used interchangeably in this article.

## Calculation

```
(advances / declines) / (up volume / down volume)

```

• Advances: number of stocks in the index that closed up on the day
• Declines: number of stocks in the index that closed down on the day
• Up Volume: total volume of advancing stocks
• Down Volume: total volume of declining stocks

## Chart Scaling

The Arms Index can be displayed with a log scale or an arithmetic scale. Log scaling shows an equal distance for equal percentage movements. Arithmetic scaling shows an equal distance for each unit on the scale. On a log scale, a move from .50 to 1 (+100%) will be the same distance as a move from 1 to 2 (+100%). This is reflected with the yellow highlights on the next chart. On an arithmetic scale, a move from .50 to 1 (+.50) will be half the size of a move from 1 to 2 (+1). This is reflected with the orange highlights on the next chart.

The log scale evens out the oscillations of the Arms Index. Spikes on the arithmetic scale look out of proportion to the overall fluctuations. The data itself is not different. It is just presented differently. There is no right or wrong answer when it comes to scaling. The choice depends on individual preferences.

## Overbought versus Oversold

The settings for overbought and oversold depend on the smoothing of the Arms Index. An unadulterated Arms Index will be more volatile and require a larger range to identify overbought/oversold conditions. A 10-period SMA smooths the data and a smaller range is needed to generate overbought/oversold signals. The next chart shows daily closing values for the NYSE Short-Term Trading Arms Index (\$TRIN) with a log scale. Surges above 3 are deemed oversold and dips below .50 are deemed overbought. The NY Composite is in a larger uptrend because it is above its 200-day moving average. As such, oversold levels are preferred in order to generate bullish signals in the direction of the bigger uptrend. The green dotted lines show oversold levels in early September, early October, early November and early December, pretty much one per month.

The next chart shows the Nasdaq Short-Term Trading Arms Index (\$TRINQ) as a 10-day SMA. Notice that the range is narrower with overbought above 1.20 and oversold below 0.80. With the Nasdaq above its 200-day moving average, oversold signals are preferred to trade in line with the bigger trend. There were oversold readings in June, August and October.

The next chart shows the Nasdaq Short-Term Trading Arms Index (\$TRINQ) in 2008. The Nasdaq was in a downtrend as it traded below its falling 200-day moving average most of the year. The 10-day SMA for TRINQ dipped below .80 in late April and again in mid August. The April overbought reading was early, but the August overbought reading nailed the top in the Nasdaq. The subsequent plunge in the Nasdaq pushed the 10-day Arms Index above 3 in October as selling pressure intensified.

## Conclusions

The Arms Index is a volatile breadth indicator that can be used to generate overbought and oversold signals. It is preferable to trade in the direction of the underlying trend. Short-term traders can use the unadulterated Arms Index to generate short-term signals. A 10-day SMA can be applied to generate more medium-term signals. The Arms Index is just one indicator and chartists should employ other aspects of technical analysis to confirm or refute signals generated.

## SharpCharts

Stockcharts.com users can plot the Arms Index for two different exchanges:

• NYSE - Short-Term Trading Arms Index (\$TRIN)
• Nasdaq Composite - Short-Term Trading Arms Index (\$TRINQ)

Use the Arms Index as the main symbol if you prefer to use a log scale, as in the example below. This places the indicator in the big window and users can check the "log scale" option below the chart. Chartists can also add horizontal lines for overbought and oversold levels. The underlying index can be plotted by selecting "price" in the indicator drop down and entering the desired index symbol. Click here for a live chart with the Arms Index.