Volume studies can very often accurately signal ahead of time significant changes in price, whether short or long term. Since high volume can attend both intense buying as well as intense selling, the most effective indicators relate up volume to down volume to determine which trend is prevailing in the market, and to signal conditions where the market is reaching overbought or oversold states. Volume tends to lead price, and therefore has very useful forecasting value. We use daily total market volume compiled from the New York Stock Exchange (NYSE), NASDAQ, and American Stock Exchange (AMEX), plotted against the Dow Wilshire 5000 Total Market Index (DWC). Our volume charts look at both long-term and short-term volume trends:
Arms Index/TRIN: This is one of the most widely used volume indicators, developed by technician Richard Arms in the 1970s. The Arms Index relates daily advances and declines to daily upside/downside volume. The general rule-of-thumb for interpreting the chart are that readings below 1.0 are considered bullish. Readings in the .70-.80 range are considered extremely bullish and warn of overbought conditions. Conversely, readings above 1.0 are considered bearish, and readings above 1.35 are alerts to oversold conditions and potential reversal to the upside. There are a few variations on the original Arms Index. We plot the traditional Arms for the long-term analysis, using an 89 day moving average, as Mr. Arms suggests. Additionally, we plot 55 and 21 day Arms TRIN charts for comparison. Note that we plot the chart data inversely, so that it parallels market action.
Market Participation Index (MPI)
Developed at Market Harmonics, this chart measures the ratio of upside/downside volume to total volume. In a sense, it's a relative strength look at cumulative daily upside/downside volume, against total cumulative volume. We provide both a ten year and 3 year chart to compare over different historical periods. We use total volume as a proxy for participation, and measure whether it is leaning bearish or bullish. The MPI differs from the Arms Index in that it focuses purely on volume trends without advance/decline data for the calculation. It also differs from other similar indicators in that it relates the proportion of upside/downside volume to total volume, which I believe helps in defining the overall long-term volume trend. Percentages are used to represent the relationship of upside/downside volume.
We feature two indicators that have proven very useful for short-term trading:
Eliades New TRIN: Developed by Peter Eliades of Stock Market Cycles, the New TRIN is a further development of his Open TRIN system. The New TRIN combines the best features of the Open TRIN system and the original Arms Index. It also has a good reputation for giving fairly reliable short-term sell signals. The rule of thumb is that a move from below .80 to above .80 signals that selling is likely within the next few days. These observations, though, are based on applying the New TRIN to NYSE daily volume data. In applying the NewTRIN to total market volume (we include volume totals for the NYSE, AMEX and NASDAQ Comp in our calculations) our observation has been that lows in the .65-.70 area are sell signals, and highs in the .90-1.00 area are potential buy signals. Note that we also invert the scale to parallel highs and lows in price.
NASDAQ New TRIN: Same formula specifically applied to NASDAQ Composite
Relative Upside/Downside Volume Oscillator: Developed at Market Harmonics.com, the Relative Upside/Downside Volume Oscillator is a short-term Rate-of-Change indicator based on our Market Participation Index (see above). The indicator was designed to give short-term buy/sell signals, based on zero line crossovers. Like all such ROC oscillators, the further from the zero line, the greater the chances of reversal. The Relative Upside/Downside Volume Oscillator is very sensitive, and upward movements are associated with buying, and downward with selling. Technically, any downward move in the indicator line should be an alert that sellers are coming into the market, even if for a brief period. Crosses of the zero line, and their distance from it, help indicate the maturity of the buy/sell trend. Used in combination with the New TRIN and other technical indicators, the Relative Upside/Downside Volume Oscillator can be a very handy trading tool.
NASDAQ Relative Upside/Downside Volume Oscillator: Same formula specifically applied to NASDAQ Composite
Click the links below to see our volume charts.
Market Participation Index
Eliades New TRIN
Relative Upside/Downside Volume Oscillator
NASDAQ Composite New TRIN
NASDAQ Composite Relative Upside/Downside Volume Oscillator