The Arms Index was developed by Richard Arms in 1967. Over the years, the index has
been referred to by a number of different names. When Barron's published the first article
on the indicator in 1967, they called it the Short-term Trading Index. It has also been
known as TRIN (an acronym for TRading INdex), MKDS, and STKS.
The Arms Index is primarily a short-term trading tool. The Index shows whether volume
is flowing into advancing or declining stocks. If more volume is associated with advancing
stocks than declining stocks, the Arms Index will be less than 1.0; if more volume is
associated with declining stocks, the Index will be greater than 1.0.
The Index is usually smoothed with a moving average. I suggest using a 4-day moving
average for short-term analysis, a 21-day moving average for intermediate-term, and a
55-day moving average for longer-term analysis.
Normally, the Arms Index is considered bullish when it is below 1.0 and bearish when it
is above 1.0. However, the Index seems to work most effectively as an overbought/oversold
indicator. When the indicator drops to extremely overbought levels, it is foretelling a
selling opportunity. When it rises to extremely oversold levels, a buying opportunity is
approaching.
What constitutes an "extremely" overbought or oversold level depends on the length of
the moving average used to smooth the indicator and on market conditions. Table 5 shows
typical overbought and oversold levels.
|
Table 5 |
|---|
| Moving Average |
Overbought |
Oversold |
| 4-day |
0.70 |
1.25 |
| 21-day |
0.85 |
1.10 |
| 55-day |
0.90 |
1.05 |
|
