Last Update: August 2021

Today was a rally day in the markets with a lot of supports broken, a lot of fear in the news, and a lot of reason for people to panic and forget about the internal indicators. The internals on Monday’s close predicted a move up today.

When I see moves down that are serious like we saw on Monday, I don’t forget to look at the internal indicators of the markets. They can help you predict, position, and profit. If you go to the TRADE CENTER tab of the site, we have a few of our favorite indicators there. My personal favorite is the TRIN indicator. I call it the trend reversal indicator.

Also known as the Short-Term TRading INdex, the Arms Index is a breadth indicator developed by Richard W. Arms in 1967. The index is calculated by dividing the Advancers/Decliners Ratio by the Advancer/Decliner Volume Ratio. Typically, these breadth statistics are derived from NYSE or Nasdaq data, but the Arms Index can be calculated using breadth statistics from other indices such as the S&P 500 or Nasdaq 100. Because it acts as an oscillator, the indicator is often used to identify short-term overbought and oversold situations. A moving average can also be applied to smooth the data. The terms Arms Index and TRIN are used interchangeably in this article.

Simply put, if the TRIN is above 2.0 on a down day, there is a high probability that the market will be up soon or the next day.

The picture of the TRIN shown here shows that the market closed and the TRIN was well above 2.

This is basically saying yes, the market is down and the volume in the down stocks is at least twice as much as the ratio of down stocks to up stocks. There’s a very high conviction of selling. When you get too many sellers on the short side and not enough buyers, it gets to the point where there is an imbalance in the markets. This is when the market makers are most likely holding the imbalance and need to focus on getting the buyers to step in.

If TRIN closes above 2.0, it doesn’t mean the trend is going to reverse the next day and go bullish for the next few days and hit new highs. It just means there will most likely be an up day following, a pivot or short-term swing low, or even the few day bounce, or retracement known as the “dead cat bounce”. The bigger the volume on a down day with the TRIN above 2.0, the bigger the bullish bounce the next day.

Also on the TRADE CENTER tab is the VIX tab: another reversal indicator. If the VIX is outside the Bollinger band, then the market is close to a reversal. As soon as it crosses back inside the band, that’s usually a good signal for the switch from bears to bulls and vice-versa.

You can also put the symbol UUP (U.S. dollar) in the quote box instead of the VIX for another reversal indicator when outside the Bollinger band.

We had both the TRIN and the VIX signaling reversal at the close of December 10, which was Wednesday. Having both internal indicators signaling is a real strong sign the market would be up the next day.

Thursday morning pre-market economic news was positive and futures were up. What do you do to cash in on your crystal ball that says we are going to be up? This is when you run scans of sectors and stocks in an uptrend and have nice ATRs (big daily moves). Set your triggers to get in right above the previous day’s high by about 15 to 20 cents so as it rises and triggers, you buy calls or even the stock. I’m happy with just a 25 cent move on the stock as a stock scalping daytrader, or anything over $100 profit on the calls. We used to say TRIN is over 2.0, buy OTM calls on your favorite bullish stock that moves at least 2 points a day on average or an ATR of 2 or greater.

Also, a bullish marketplace is a great place to sell puts. It’s a big down day, so Implied Volatility is going to spike up and give option premiums a bigger price. After the bullish bounce, the premiums deflate from the volatility drop and the bullish move. This is a theta scalp or vega drop.

Make the TRIN part of your daily routine. Everything we have in the TRADE CENTER tab of the site has a purpose. Go back and compare what happens to the SPX the next day after the TRIN closes above 2.0. Hope this helps you prosper going forward.

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