Thursday, August 7, 2014

A Sign of Possible Capitulation: Trin Closes Over 2.0

Trin (also called the Arms Index) closed above 2.0 today. This is usually a positive for equities, at least over the short-term.

Trin is a breadth indicator. It is derived by dividing the advance-decline ratio for issues by that for volume. A close over 2 means that down-volume was twice down-issues; in other words, stocks fell on relatively high volume.

At a minimum, stocks have very often been higher the next day and also higher 5 days later. This is particularly true when the spike higher in Trin has occurred after several days of selling, like now. In the chart below, the vertical lines are Trin spikes over 2 during the past 2 years.

Many of these Trin spikes, especially in the past year, have also come at important lows: September, February and April, for example. In June 2013, the Trin spike was 3 days before the low after the market had been falling for 4 weeks. In other words, a spike in Trin can mark capitulation.

The biggest failures in a Trin spike coinciding with a relative low in equities usually occur when the spike comes after stocks have been on the rise. In October and November 2012 and in February and June 2013, the spike in Trin occurred when SPX  was within a day of a 5 or 10-day high. It signaled a change in direction. That’s not the case here.

There are never guarantees, but we are likely to see SPX move higher in the next 1-5 days. That has been the pattern in the past. That doesn’t necessarily mean the end of the 2 week downtrend. The Trin spike in March this year was followed by higher prices but also preceded the eventual low a month later, in April.