|The TRIN is designed to compare the volume in advancing issues with the volume in declining issues. When volume in advancing issues outpaces volume in declining issues, the TRIN is below 1 and the market is considered strong. When volume in declining issues outpaces volume in advancing issues, the TRIN is above 1 and the market is considered weak.|
|Figure 1: Examples of TRIN.|
|Graphic provided by: MetaStock.|
|The TRIN has an inverse relationship with the market. It rises when volume in declining stocks is strong and declines when volume in advancing stocks is strong. Therefore, the TRIN is often displayed with an inverted scale. Because daily fluctuations can be quite volatile, a moving average is often used to smooth the data series. In addition, the TRIN fluctuates from zero to infinity and analysts also employ semi-log scales to balance the fluctuations. Figure 1 above shows the difference between inverted and normal scales as well as semi-log versus arithmetic scales.|
Figure 2: Daily chart of Nasdaq.
There are a number of methods to use the TRIN indicator with overbought and oversold readings quite popular. Figure 2 shows a 5-day simple moving average for the TRIN over the last 12 months. The TRIN became oversold between 1.5 and 2 at least five times over the past year (green arrows). These oversold readings preceded a bounce in the Nasdaq Composite and continuation of the uptrend. Currently, the 5-day SMA for the TRIN has yet to move below 1.5 this year to produce an oversold reading. Until this occurs, there is further room to fall before traders can expect a sizable bounce.
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