The Arm’s Index—sometimes referred to as the trader’s index or TRIN—is another widely used breadth indicator with short-term and longer-term implications. Richard Arms, Jr. constructed the Arms Index using:
- Number of Advancing Issues [A]
- Number of Declining Issues [D]
- Volume for Advancing Issues [AV]
- Volume for Declining Issues [DV]
His 1989 book, “The Arms Index: An Introduction to the Volume Analysis of Stock and Bond Markets”, is a resource you may want to read if interested in the logic for creating the indicator along with Mr. Arms’ observations over the years. The Arms Index is also included in Greg Morris’ 2005 book: “The Complete Guide to Market Breadth Indicators.”
Similar to the McClellan Summation Index, strong fluctuations in the underlying data makes the Arms Index well suited to the addition of moving averages for analysis. In addition, indicator extremes may provide information on short-term reversals.
Arms Index Construction & Readings
The Arm’s Index is calculated as follows:
[A / D] / (AV / DV]
I would periodically include the Arms Index in Market Outlook pieces when breadth data was still available in ProfitSource. The Signals and Assessment guidelines that follow are excerpted from an older article of mine. Please note I have not been tracking this information in recent years and need to once again assess the robustness of these settings in this market.
August 8, 2007 article: Analytical Toolbox: Market Outlook & Breadth
The next few sections provide information about using the indicator for trade signals and general market assessment, based on Arms’ work.
General Market Conditions
Overbought/Oversold [indicators can remain overbought/oversold for extended periods of time]
- 4-day SMA: 0.70/1.25
- 10-day SMA: 0.80/1.20
- 21-dy SMA: 0.85/1.10
- 55-dy SMA: 0.90/1.05
Long-Term: When 55-dy SMA stays between 0.8 and 0.86 for an extended time, top may be coming (’87, ’99). note: I need to review 2008 readings.
It is acceptable to substitute 21 & 55-day EMA for 21 & 55-day SMA
The scale for the Arms Index is provided on the right in Figure and needs to accommodate extreme readings above the 120 level in 2008. This makes the more typical ranges difficult to discern, but is worth noting.
Figure 1 NYSE Composite Index and Arms Index with 21-day & 55-day SMAs (2007-2011)
In Figure 2 a shorter time interval is used and a portion of the extreme highs cut from the scale, which is inverted. The adjustment to the scale was completed to make the readings more intuitive, with movement downwards bearish and movement upwards bullish.
In addition to a dark line at the 1 level, extreme bullish levels (above 0.70) are marked by the dotted green line and extreme bearish levels (below 1.30) are marked by the dotted red line. Please not these reflect 1989 extremes and will be reviewed for next week.
Figure 2 NYSE Composite Index and Arms Index with 21-day & 55-day SMAs (8/2011-5/2012)
The early April decline in the NYSE Composite was preceded by a decline in the 21-day SMA of %Advancers that began in late January. This diverging action served as a warning that the current uptrend was starting to weaken. More recently the breadth indicator has confirmed price action with both bottoming towards mid to late April.
Summary & Up Next
The Arms Index provides traders with short-term and longer-term signals and as with other measures may have extreme readings that change moderately over the years. Moving averages can be used to slow down index movement into extreme regions so that divergences with the underlying index can be monitored. Crossover techniques can also be used.
Extreme indicator levels for the Arms Index and moving averages will be assessed next week and current readings for both the Arms Index and the McClellan Summation Index will be provided.
Arms, R. (1989). The Arms Index: An Introduction to the Volume Analysis of Stock and Bond Markets. New York, NY: The McGraw-Hill Companies.
Morris, G. (2005). The Complete Guide to Market Breadth Indicators. New York, NY: The McGraw-Hill Companies.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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