Stocks & Commodities V. 9:4 (145-147): Using The Arms Index In Intraday Applications by Richard W. Arms Jr.

Using The Arms Index In Intraday Applications

by Richard W. Arms Jr.

few weeks ago, I received a call from an analyst who had read a number of my recent articles in

STOCKS & COMMODITIES and had an interesting question. "I've developed a new index to measure the
market and want to know how I can have it named after me," he said. My somewhat facetious advice
was, "All you need to do is wait about a quarter century, have a lot of luck and have some very good
friends!"
I wish I could have been more helpful to the gentleman, but there really was no better answer. He was
referring, of course, to the fact that the index that I invented in 1967 is now known as the Arms Index.
But it wasn't always that way. It was first called TRIN, short for Trader's Index, because that was the
symbol for it on one of the quotation services. Only after many years and a good deal of effort has the
index's name changed. This was done primarily through the efforts of a great number of highly respected
technicians who thought that credit should be given to the developer of a technique. The change was
gradual, until it is now carried on most electronic systems, both national TV news networks, most
advisory letters and many business publications as "ARMS"
DEFINING AN INDEX
What is this index, and why hasn't it fallen by the wayside as another indicator that became too popular
and thereby destroyed itself? It is just a very simple calculation that tells us whether the up stocks or the
down stocks are getting more than their share of the volume. The index is based on the assumption that
volume tends to swing in the direction of market sentiment. If we are in a bullish atmosphere, volume
will tend to be proportionately higher in the stocks that are going up. If the bears are in control, the
volume will tend to be proportionately heavier in those stocks that are declining. The important term here
is "proportionate." Just measuring advancing and declining issues can be misleading, and so can just

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Stocks & Commodities V. 9:4 (145-147): Using The Arms Index In Intraday Applications by Richard W. Arms Jr.

measuring advancing and declining volume. By combining these numbers, however, we end up with a
measurement that gauges the true underlying pressures of the marketplace. The formula is extremely
simple; it is a ratio of two ratios:
Advances
Declines
= Arms Index
Advancing volume
Declining volume

For example, today as I write this, the market has been open for a little more than two hours and my
quote machine shows that 445 stocks are up for the day, while 837 are down. The volume on the
advancing stocks is 17,982,400 shares and the volume on the declining stocks is 35,374,000 shares.
Plugging these numbers into the formula, we have:
445
0.5317
837
=
= 1.05
17,892,400
0.508
35,374,000

When I first developed this index in 1967, and for a number of years afterward, it was necessary to
perform this calculation many times during each trading day. Now, however, the calculated value appears
on most quotation services, eliminating the work. Nevertheless, if a trader is to understand the use of the
index, it is necessary to first understand its derivation. This will bring home the logic that makes it so
useful.
Using the index, it's clear that a reading of 1.00 would be a standoff, anything under 1.00 would indicate
that the up stocks were getting more than their share of the volume and anything over 1.00 would indicate
that the down stocks were getting more than their share of the volume. The reading in the example above
shows that the down stocks are getting more than their share of the volume, hence the reading over 1.00.
Note, however, that the down stocks outnumber the up stocks by about two to one, which in itself would
seem to be a very bearish sign. The fact that the index is, in fact, very close to neutral would tell us that
the sellers are not as much in control as one would first assume. There is a good deal of accumulation
taking place under the guise of a down market.
INDEX EFFECTIVENESS
The index is effective because it very simply, with a single number, answers the question, "Are the up
stocks getting more than their share of the volume?" If they are, it is a bullish sign, and that is signaled by
an index that is less than 1.00. If they are not, it is a bearish sign, and that is signaled by a reading that is
over 1.00. It would have been logical to invert this calculation when I first invented it, so that low
numbers would reflect weakness and high numbers would reflect strength, but I never thought that the
index would become so popular, and by the time I came to the realization that I could invert the numbers,
the calculation had become so accepted and entrenched that it was too late. Therefore, we are stuck with
the values that say "big is bad and little is good."
Often, I am asked if the index is likely to self-destruct with so many people using it. The nature of the
index is such that it contains and reflects, instantly, the actions of those who are watching it. The index's
users create volume, which then causes the index to readjust. For this reason, it continues to be useful in

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Stocks & Commodities V. 9:4 (145-147): Using The Arms Index In Intraday Applications by Richard W. Arms Jr.

spite of its popularity. In Fi gure 1, we are shown t he values for the index for each day of the last six
months. Most reading s are quite close to 1.00, with about 10% g iving abnormally high (bearish) reading s
and about the same percentag e showing abnormally low (bullish) reading s. We can also see that there
seems to be little corre lation da y to day. Today's closing index seems to bear little informa tion a s to what
we can expect for tomorrow. But it is clear t hat some areas on t he graph seem to have more low readings,
while others a ppear to ha ve more high readings. In future articles I will examine this tendency and utilize
it as a way of making intermediate-term and long er-term market projections.
APPLYING THE INDEX
In the meanwhile, let's look what this index can do for the trader during the trading day. We know that
the normal reading will be close to 1.00 in a market that is doing nothing, there is a tendency toward
numbers below 1.00 when the market is strong and above 1.00 when the market is weak. In Figure 2, we
see a plot of the last year of trading on a closing basis. The vertical axis represents the net change in the
Standard & Poor's 500 index and the horizontal axis represents the value of the Arms Index. Each point is
the combination of those two values. As you can see, the points tend to cluster in an area, with fewer
points falling outside that zone. We can assume that the cluster is the ''normal'' zone, with points that are
away from it anomalies. This normal zone is the darkest part of the clustered postings and runs from the
upper left to the lower right.

The Arms Index was originally developed for intraday timing.

Later, it became apparent that it was also valuable as a
longer-term tool for forecasting market moves.
I suggest keeping or reproducing this chart to use as a reference. During the trading day, ascertain the net
change in the S&P 500 and the value of the index, and see where this puts you on the chart. Usually, you
will find that you are in the normal zone. Our example above falls in that zone, so we know it was not an
unusual combination of market change and the Arms index.
When the combined values fall in the normal zone, you can expect that the changes will take place along
the axis of the normal zone. If the market starts to advance, the index is likely to drop to lower values,
moving the intersection on the chart toward the upper left corner. If the market starts to decline, the index
will probably start to get more bearish, moving the plot to the lower right. The plots will tend to try to
stay in the normal zone. If a posting takes you away from the normal zone, later action is likely to take
you back into the normal zone again; therefore, it becomes a very short-term forecasting tool. Since the
index will often precede the market, the posting will move horizontally and then vertically. In a market
about to strengthen, we might see the posting move to the left as the index dropped and then upward as
prices rose. This action might take it out of the normal zone and back in again.
Take note that we are paying particular attention to the direction of movement of the index. Even without
the chart, one quickly becomes aware of the direction and speed of the changes. This is more important
than the absolute value of the index. If it quickly moves toward higher numbers, regardless of its current
reading, it is warning of an impending downward move in the market, and a rapid move in the Arms
Index to lower numbers is often a warning of a market rise.
During the trading day I watch both the Arms Index and the actual ticks the number of stocks whose

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Stocks & Commodities V. 9:4 (145-147): Using The Arms Index In Intraday Applications by Richard W. Arms Jr.

FIGURE 1: The Arms Index is usually close to 1.00, with about 10% giving abnormally high (bearish)
readings and about the same percentage showing abnormally low (bullish) readings.

Stocks & Commodities V. 9:4 (145-147): Using The Arms Index In Intraday Applications by Richard W. Arms Jr.

FIGURE 2: The Arms Index tends to lead the S&P 500. /f the Arms Index begins to decline, look for a
rally in the S&P

Stocks & Commodities V. 9:4 (145-147): Using The Arms Index In Intraday Applications by Richard W. Arms Jr.

last trade is an uptick or a downtick and I look for changes rather than actual values. Rapid changes
can alert me to the beginning of important swings. Even if I am not day trading, the index will help me
decide when to initiate longer-term positions. The difference between buying near the low of the day or
near the high of the day can make a big difference in the amount of eventual profit, even if the position is
held for a number of weeks.
The Arms Index was originally developed for intraday timing. Later, it became apparent that it was also
valuable as a longer-term tool for forecasting market moves. In future articles, we will look at some of
those longer-term applications, but let us not forget that it can be very helpful in making short-term
decisions.
Richard Arms developed both the ARMS Index (sometimes known as TRIN) and Equivolume charting. He
is president of Arms-Equivolume Corporation, 1650 University Blvd. NE, Albuquerque, NM 87102, (505)
247-8118, and a vice president and technical analyst with Eppler, Guerin and Turner, Inc.

FURTHER READING
Arms, Richard W., Jr. [1990] . "Ease of movement, " Technical Analysis of STOCKS & COMMODITIES,
Volume 8: May.
___ [1989]. "Trading T-bonds with Equivolume," Technical Analysis of STOCKS & COMMODITIES, Volume
7: September.
___ [1989] . "What volume is it?" Technical Analysis of STOCKS & COMMODITIES, Volume 7: December.

Figures

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