V.9:10 (419-421): An Issue/Volume Weighted Long-Term Arms Index by Jack Rusin

An Issue/Volume Weighted Long-Term Arms Index by Jack Rusin

Consider, if you will, two vastly simplified trading days on the New York Stock Exchange (NYSE). On the first day, 10 issues advance and 10 decline with 100 shares of up volume and 200 shares of down volume. On the second day, the same 10 issues advance and the same 10 decline, but this time there are 200 shares of up volume and only 100 shares of down volume.

Using the Arms index, or TRIN (for trading index), for the first day would result in [10/10]/[100/200] or 2. The TRIN for the second day would be [10/10]/[200/100], or 0.50.

So far, so good. But what if we want to develop a long-term Arms index? To keep matters simple, let's call two days "long term," since the same principles apply regardless of the time period chosen. In the May 1991 STOCKS & COMMODITIES article by Richard Arms, the inventor of the index wrote in reference to the 21 - and 55-day crossover: "It is merely the 21-day moving average of the Arms index superimposed upon the 55-day moving average of the Arms index. It is a simple arithmetic moving average in both cases."

Now apply this formula to our example, using 2DAI for the two-day Arms index: 2DAI = [2.00 + 0.50]/2 = 2.5/2 = 1.25. According to the index theory, a reading of 1.00 is neutral both daily and long term. A reading below one indicates that, on average, more volume is going into each advancing issue, while a reading above one indicates that more volume is going into each declining issue.