Wednesday, January 09, 2008

Arms Index (TRIN) very Bullish for Contrarians at 1.87

The 10-day moving average (10-dma) of the Arms Index ($TRIN) is giving a very bullish signal for us contrarians as these charts below show.



Richard (Dick) Arms developed the TRIN, or Arms index, as a contrarian indicator to detect overbought and oversold levels in the market. Because of its calculation method, the TRIN has an inverse relationship with the market. Generally, a rising TRIN is bearish and a falling TRIN is bullish. Sometimes you will see the scale of the TRIN inverted to reflect this inverse relationship.

A number of TRIN interpretations have evolved over the years. Richard Arms, the originator, uses the TRIN to detect extreme conditions in the market. He considers the market to be overbought when the 10-day moving average of the TRIN declines below .8 and oversold when it moves above 1.2. Other interpretations seek to use the direction and absolute level of the TRIN to determine bullish and bearish scenarios. In the momentum driven markets, the TRIN can remain oversold or overbought for extended periods of time.
As the charts above show, the 10-day moving average of the TRIN is well above 1.2 and has exceeded the very rare area of 1.5 and higher.
If pressed, I would have to say it looks like we could be making a "bottom" very similar to the one made in 2002/2003. The markets might want to "annoy us" and churn here or even go lower to get the AAII bull/bear survey more negative, but this does not look like the end of the bull market to me at all.
Ding.