Arms Index at Trade10.com

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Arms Index

The Arms Index is an indicator that uses advancing and declining stocks and their volume to measure intra-day market supply and demand and can be applied over short or longer time periods. The Arms Index is named after its creator Richard W. Arms and is also know as the "TRIN" index The formula is simple and can be applied to any index for which the data is available. It is simply (Advancing issues/Declining issues) / (Advancing volume/ Declining volume). If more volume goes into advancing issues than declining issues the Arms Index falls below 1.0. If more volume goes into declining stocks than advancing stocks the Arms Index rises above 1.0.

A display of the Arms Index is followed by a graph of the S&P500 Index over the same period to give a sense of application. Intra-day, the Arms Index is used for a quick view of changing supply and demand for the overall market and over time it can be used to look for trends in changing supply and demand. In addition, the Arms Index can be used for intermediate term trading using moving averages to smooth the data over an appropriate period.

A look at the S&P500 Index over the same period

Notes on the Arms Index

For the Arms Index, readings over 1.00 are bearish, but extreme readings may indicate that a market reversal is near. In general, any time the index gets over 2.5, a rally could occur near term. The caution is to never rely on one indicator and to have a strong fundamental understanding of why the current market trend is in place and what reasons if any might emerge that could change the current perceptions on fundamental valuations. From a technical standpoint it is best to wait for price confirmation before trading or a strengthened argument by looking at other indicators and market data.
The Arms Index was created by relating the volume of advancing issues to the volume of declining issues. Generally a healthy volume accompanying a rise in prices is the forerunner of a better market than low volume.
Using moving averages of the index is one way to smooth the Arms Index. Some traders look for moving average crossovers or zero line crossovers in developing trading uses for the Arms Index.
Usually numbers between zero and one are Bullish, while numbers above 1 are bearish.
Interpretation : 0-1 -- Bullish >1 -- Bearish
Diverging plots of price/volume against the Arms Index can be an indication of a loss in Momentum.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.