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Ztrader – Market Breath Indicators (1) 港股博弈

Oct 14, 2013

Market Breath indicators attempt to guess the direction of the overall market by analyzing the number of stocks advancing relative to the number declining.

Arms Index, called also TRIN, the Trader’s Index, created by Richard Arms, measures the market breath by:

TRIN = (Advancing Stocks / Declining Stocks) / (Advancing Volume / Declining Volume)

When it is below 1.0, the market is considered as bullish. When it is above 1.0, the market is bearish.

Here, the plot of TRIN since 2011:

Arms Index against HSI one day change, from 2007 to Oct 14, 2013:

It shows some extreme cases, where TRIN values can shoot up to abnormally high during very bearish market.

If zoom into the “regular” and normal range:

The center of the chart is about at (0.0, 1.0), which indicate when HSI index is no change, TRIN shall be around 1.0. The relative empty areas in upper right and lower left in the chart, indicates the effectiveness of the indicator is confirmed.

Here is the distribution of TRIN between 0 to 3.0 :

The chart shows a more than neutral view. The median value is 0.85, indicates in general the market is on a slightly bullish side.

Here is the one day HSI change distribution:

The chart shows a very neutral view. The median value is 0.056%, indicates in general the market is on average very neutral.

If there is a relationship between TRIN and HSI, I would say the neutral point of TRIN value is 0.85 instead of 1.0.

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Then how about MUPI distribution ?

The median value is 0.175%. In fact I think TRIN is more correlated to MUPI.

How about TRIN vs MUPI one day change:

Still not easy to read.

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Prediction Power of TRIN

How about using today’s TRIN to predict next day’s market direction ?

Seems no useful relationship.

If only consider TRIN value < 0.6 (a bullish day), plot against the next day performance:

HSI gain is about 0.028%, almost zero prediction value.

If uses MUPI:

Average gain is 0.18%, median 0.27%, better than HSI.

In conclusion, Arms Index is more related to MUPI than HSI. It makes sense. A bullish day indicates the next day shall be a bit bullish also. It has no one day prediction power with one day Arms Index on HSI.

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While it seems the prediction power of TRIN for next day’s trading is not much, Arms suggested a moving average of TRIN can be used to pick bottoms and tops for the market. Here a 21 days moving average is used and oversold level set to 1.5:

The peaks seems shifted a bit. MUPI version is better :

Except on 2007, the recent lows of the market is quite accurately captured. One can enter the market after the moving average leaves the red zone.

It seems more difficult to predict market tops using this indicator.

In conclusion, it is an effective tool to help locate the market bottom for MUPI rather than HSI.