Saturday, December 24, 2005

TRIN and the Flat Eight-Day Period

The S&P 500 cash index has been relatively flat over the past eight trading sessions, but we've seen more volume in advancing issues than declining ones, leaving us with an eight-day TRIN below 1.0. I decided to look at what occurs eight days following flat eight-day periods.

Overall, there's no edge following a flat eight days in the market. Since January, 2003 (N = 744), I found 55 instances of eight-day periods in SPX where the market was up or down within .20%. Eight days later, the average price change was .21% (31 up, 24 down). This compares to an average eight-day change of .37% (440 up, 305 down) for the sample overall.

A median split of the flat eight day periods based on the eight-day TRIN shows an interesting pattern. When the TRIN was high (more volume in declining issues), the average price change eight days out was .77% (17 up, 11 down; N = 28). When TRIN was low (more volume in advancing issues, such as we've had recently), the average price change eight days later was -.36% (14 up, 13 down).

This appears to be another instance in which a technical indicator shows particular value during periods of neutral price change in the markets. When there is strong market selling during a neutral eight-day period, the next eight days tend to be stronger than when there is strong buying in such a period. Once again, we see where buying over the last several days is not generating further upside expectations.