by Arthur A. Merrill, C.M.T.
The Arms index has been verified, deified, and even modified, certainly within the pages of STOCKS &
COMMODITIES. Now the index is examined again, this time by noted veteran technician Arthur Merrill, to
find out whether the daily closing Arms index is helpful in pointing the probable direction of the market
on the following day.
The index originally known as TRIN, or the short-term trading index, is now properly labeled the Arms
index. (I may have been the first to suggest this change.) The index's usefulness and versatility has been
discussed in several issues of STOCKS & COMMODITIES. Here, I'll address whether the daily closing Arms
index is helpful in pointing the probable direction of the market on the following day. To appreciate the
meaning of the index, which is defined in the Traders' Glossary, I modified it to the following formula,
which gives the same answer. The numerator is: Total volume declining stocks divided by number of
declining stocks. The denominator is: Total volumes rising stocks divided by number of rising stocks.
This modification of the formula shows the index as the average volume of declining stocks divided by
the average volume of rising stocks. High figures are bearish; low figures are bullish. This is intuitively
contradictory. Richard Arms told me that if he had to do it over again, he'd invert the formula to make
high figures bullish.
In any case, I asked my computer to review a data bank of 435 trading days and report what happened to
the DOW Jones Industrial Average (DJIA) on those days after various levels of the closing Arms index.