|  AUG 1992

Market Thrust by Tushar S. Chande

Market Thrust by Tushar S. Chande An abundance of articles and letters concerning the Arms index, or the trading index (TRIN), during the past year was one proof of its popularity. The articles were concerned with both the uses and limitations of the Arms index. The two major problems with the Arms index, as characterized in the articles and letters, arose in constructing a long-term Arms index and with using the index in mixed markets. STOCKS & COMMODITIES contributor Tushar Chande proposes a way to measure market thrust and overcome the limitations of the Arms index. Richard Arms invented his Arms index, or the trading index (TRIN), to indicate when abnormally high volume was going into advancing or declining stocks. He defined it as: .... A reading of 1.00 is neutral; a value greater than 1.0 indicates more volume per declining issue, while a value below 1.0 shows more volume per advancing issue. Broad buying forces values below 1, while widespread selling sends the index soaring above 1. A 10-day simple moving average (SMA-10) is usually used to smooth daily data. Oversold market conditions occur when SMA-10 rises above 1.20. Conversely, the market is overbought when SMA-10 falls below 0.80. INDEX LIMITATIONS Jack Rusin examined the limitations of the Arms index in two recent articles. In October 1990 he looked at the problems in calculating a long-term (21-day or 55-day) Arms index. Rusin explained that if two days are the opposite of each other, then a simple average of the Arms index can be misleading. He recommended using an issue/volume-weighted long-term Arms index (LTAI): ...

by Tushar S. Chande, Ph.D.