Trading What I See

Watching the overall market, the number of advancing and declining stocks, the rise and fall of sectors, and what is happening to volume is all a part of understanding the context of your trades. Although most traders can see the importance of this information, setting up a structure that is easy to use can be intimidating. I’ll be out of town the day before and after Thanksgiving, so I’ll use this opportunity to show how I track the rest of the market. I’ll start by talking about TRIN.

I have the actual numbers for the NYSE advances and decline, as well as up and down volume figures, showing on one of my monitors all the time (image on left.) But one key element of my trading requires that all my basic information can be interpreted at a glance, and the raw numbers don’t do that job.

Richard Arms came up with one solution in 1967. It is the ARMS index, but more people probably know it by the name TRIN, or the Short Term Trading Index. It is an attempt to measure the amount of volume going into advancing and declining stocks by combining their ratios into a single index. The number of advancing stocks is divided by the declining stocks to get their ratio. The same is done with advancing and declining volume. Then the first ratio is divided by the second to get TRIN.

According to Gerald Appel’s Winning Market Systems

This is a quite sensitive indicator and frequently changes direction moments in advance of market turnarounds on an intra-day basis. It is usuful in trading operations but its extreme sensitivity does result in false signals and fosters emotional activity.

He goes on to say that, in its raw form, the best use is to time the exact moment for pre-planned entries or exits in the market - not as a signal in itself.

There are many ways to use TRIN, and the most simplistic don’t work very well. You’ll find it written that a number less than 1.0 is bullish and over 1.0 is bearish. As a very general observation, this is true, but it is actually the direction (or change of direction) of TRIN that is most important to traders. And that leads to a visual problem, that in turn can lead to mistakes in a fast market.

When the market is rising, the TRIN tends to be falling. When you chart the TRIN under the market, a falling TRIN is bullish, and a rising TRIN is bearish. In one of his columns Dick Arms said that if he had it to do over, he would have turned the Arms Index upside down to make it easier to read. Of course, after almost 40 years, no one is going to change the actual numbers.

But with a computer you can reverse the direction of the numbers yourself. Because the indicator is so sensitive, many traders slow down the action of the TRIN, usually with some type of moving average. I use a modified MACD on the raw TRIN, and in the process, I flip it upside down.

The MACD (created by Gerald Appel - that’s his quote above) uses three moving averages to create a momentum oscillator. But by putting the numbers in backwards, you can reverse the direction of the oscillator. This way I accomplish two things — I slow the TRIN down to a level that matches my trading, and when my indicator goes up, so does the market.

The normal numbers for an MACD are 12, 26, and 9 — all exponential moving averages. The second moving average is subtracted from the first to give the MACD. Then you create a moving average of that result (using the third number) to create a trigger line. And if you want to reverse the direction of the oscillator, just reverse the order of the first two numbers.

Experiment with the input numbers to come up with a TRIN oscillator that matches your trading style. At the present time I’m use the Fibonacci numbers 34, 21, and 8 on various timeframes, but the goal is not to match my indicator — it’s to find something useful for you.

A magic indicator? Not at all. This is not even necessarily what your market is doing — it’s just another way of tracking whether your potential trade is riding the general market trend or fighting it. Have a nice Thanksgiving tomorrow, and Friday I’ll show you how I track multiple sectors of the market in real time.

Gerald Appel’s Winning Market Systems: Eighty Three Ways to Beat the Market

The market moved upwards quickly after the open, and that was not quite what I had expected on Election Day. Between 6:45 and 7:00 I called a top three times. But over the years I have learned to wait for setups, and none of mine appeared. None, that is, until the market started retracing the early move.

First let’s look at why this didn’t turn into a TREND DAY. It could have, with that directional morning move, but let me quote something I said from an earlier trend day on September 12th.

… but look at the 30 minute TRIN readings from this morning: .69, .74, .62, .62, .68, .79, .95. That last 95 reading came during the lunchtime consolidation.

The equivalent readings for this morning are: .88, 1.24, 1.23, 1.21, 1.13, 1.06, 1.04. Remember that readings above 1.00 tend to be bearish. The market can go up with large TRIN readings, but it’s telling you that volume is not supporting the rise.

Once you decided that a trend day was unlikely, the movements after 8:00 made some sense. There was a pullback from the peak to point #1 and then a rally. The drop after point #2 matched the first drop, with a little extra push into point #3. Many call that a Measured Move — I call it a 100% Fibonacci extension. Either way, it means that a move in one direction is matched by the next move in the same direction.

When the market pulls away from point #3 you can draw the first trendline (#1 - #3), and the parallel from point #2. There is a short sale setup at point #4 when hitting the parallel line coincides with the Stochastic reaching overbought. Then we have another Measured Move — this time matching the #2 - #3 distance and ending right at point #5.

The next pullback at #6 doesn’t reach overbought or hit the top of the trend channel, so you either missed that nice trade or had to find another entry technique. But notice what happens when we get to 100% of the #4 - #5 distance. The market tries to stop.

As I mentioned a few days ago, when the second move in a series doesn’t stop at the 100% extension, watch for a move to 168%. And that’s where we reversed. At least temporarily.

Here’s another Fibonacci extension tip. I use extensions to judge the direction of a slightly longer trend that the one I am watching. Using just the 62%, 100%, and 162% measurements I look at each “2nd” move — for example the “b” to “c” move as shown at the right of today’s chart. If the move goes to 162% of the original move, I consider the next longer trend to be up, and will probably buy retracements. If it only matches the first move, then the next longer trend is probably now sideways.

But if the extension move only reaches 62%, I’ll assume the next longer trend is still down, with the potential for a further move lower. Move “c” only reached 62% of the first move off the bottom, and that lead to exceeding the previous intraday low.

For many of us, Trend Days are harder to trade than the normal up and down moves we encounter for most of the month. I sometimes spend trend mornings trying to find reversal points that never appear. And oscillators won’t give you an oversold condition until it’s too late. What’s a trader to do?

Reading the NYSE TRIN helps. (Numbers below 1.0 - and particularly below 0.80 are bullish.) Because of the way it is calculated, the readings for the first half hour can be deceptive, but look at the 30 minute TRIN readings from this morning: .69, .74, .62, .62, .68, .79, .95. That last 95 reading came during the lunchtime consolidation.

The definition of a TREND DAY might also help. For me, a Trend Day starts and finishes at the opposite ends of a wide range day. And they often have a nice consolidation pattern right in the middle. There’s a secret in that definition. If the consolidation pattern comes in the middle, you can make a profit even if you miss the first half.

The morning session made a well-channeled nine point move containing several nice pullback entries. Then came an hour and a half consolidation during lunch. If the pattern holds, there should be another nice move in the afternoon — and there was. Another nine points.

The trendline structure is also interesting. The first channel could have been drawn 36 minutes into the trading session. It held, and the bottom trendline provided pullback entry signals until the noon consolidation. And where did the market stop in the afternoon? The other side of that same line.

If you haven’t worked a great deal with trendlines you might be surprised to see that the afternoon pullback turned around at another parallel to the original trendline drawn early in the morning. It happens often enough that you should be watching.