Chart of the Week: NASDAQ TRIN

The NASDAQ TRIN is an indicator I generally hear very little about, yet in a market where technology stocks have been leading many of the advances and decline, one that I believes deserves closer scrutiny.

In this week's chart of the week below, I show a simple NASDAQ TRIN chart that uses a 21 day exponential moving average to smooth out some of the daily noise that is common in short-term studies of this indicator. As a contrarian market sentiment indicator, the TRIN is useful for helping to identify market turning points or the potential for near-term reversals.

The chart below shows that since the markets settled down and bottomed in early March, the NASDAQ TRIN has been adept at signaling buying points (below the green horizontal line) and selling points (above the red horizontal line.) Friday’s EMA-smoothed reading of 1.28 is the highest since the mid-May bottom and suggests that the current pullback may be another good buying opportunity.

Whether or not you agree with the buy on the dip approach at the moment, you should make an effort to keep an eye on the NYSE TRIN (a.k.a. the Arms Index) and the NASDAQ TRIN as market timing signals.

For additional reading on the TRIN and the NASDAQ TRIN, readers are encouraged to check out:

• Bullish TRIN as Year Winds Down
• ARMS Index Going Back to 1992
• Bullish NASDAQ TRIN Signal

[source: StockCharts]

Put to Calls and TRIN More Skittish than VIX, VWSI

A quick programming note: henceforth, I am going to be a little more freeform with my end of week commentary, making it less VIX and VWSI-centric. Lately the VIX has been at best a sub-plot in the market turmoil and the VWSI has not generated any extreme readings, so I will be expanding my weekly scope to include some of my other favorite indicators: put to call ratios, market breadth data, TRIN numbers, etc. going forward – or whatever else looks to be most newsworthy.

The Wall Street Journal “What’s Hot and Not” graphic shows where the action was last week – and this story is starting to look familiar. Oil, gold and other commodities were the biggest gainers last week, with a weak dollar and a weak US stock market accounting for the biggest losers.

The VIX ended the week up 2.48 (+10.3%) to 26.54, with the VWSI slipping back to zero. More interesting was the action in the put to call data, where the ISEE set all-time records lows for the 20, 50 and 100 day moving averages each day from Tuesday through Friday and the CPCE (CBOE Equity Put to Call Ratio) hit a new high of 1.50. In the wake of Friday’s precipitous drop, the TRIN and NASDAQ TRIN also ended the week with extreme readings of 2.46 and 2.76, respectively.

All this continues to mean one of two things: either the market is extremely oversold and anxious investors are going to create a massive wall of worry for a nice rebound…or we are in the midst of a financial meltdown not seen in the lifetime of most investors. I continue to reside in the former camp, but am watching SPX 1310 and NDX 1725 for signs of additional cracks in the dike.

Sentiment Failures

I am of the opinion that failures usually provide more important signals than confirmations. For instance, if a company reports good news and sells off, then that action speaks louder than if the stock had bounced on the news (not withstanding all the “buy on the rumor, sell on the news” lore.) The same is true for broad market data and the broader indices. To my mind, these are fundamental failures.

There is an analogous situation with technical analysis. A failure in this context could be a stock or index that has consistently bounced off of a particular support level that now violates that support and continues lower. I believe that these TA failures speak volumes more in terms of informational content than if support had held for the n+1^th time.

Which brings us to yesterday. Two measures in particular suggested that market sentiment was so strongly negative as to make a bounce a high probability event: the ISEE had just hit a new low in its 20 day SMA and the NASDAQ TRIN (30 day EMA) had spiked to levels not seen since 2002. The bottom line is that it a bounce should have been like shooting fish in a barrel for the bulls. Since the bulls could neither hold onto their gains, nor put a dent in the selloff that ensued, I am forced to conclude that in the course of this substantial sentiment failure, they didn’t even graze any of the fish. I am also changing my bias to bearish until the bulls can demonstrate a modicum of marksmanship…

Bullish NASDAQ TRIN Signal

One of my favorite contrarian sentiment indicators is the (NYSE) TRIN and it’s NASDAQ counterpart, which StockCharts.com (responsible for the chart below) codes as the $TRINQ.

The chart I have chosen for today [Edit: updated EOD chart is first chart below; 2nd chart provides longer historical context] uses 60 minute bars over the past two months to demonstrate that in spite of the recent bounce, today’s action sets up another bullish contrarian buy signal – at least in the NDX. This signal looks stronger if you consider the possibility of some support in the 1780 area. Take this with a grain of salt, but consider that the TRINQ’s track record has been very strong as of late.

Also consider that more generally, it may pay to fade any strong move that develops in the current environment of uncertainty – and perhaps to sell premium just beyond important support and resistance levels.

 
[source:  StockCharts.com]

Selloff Overdone Prior to FOMC Minutes Release?

In the hour and 40 or minutes or so before the FOMC releases the minutes from their December meeting, I am using the market weakness to make some buys. I have a number of reasons for doing this, not all of which I am going to detail here. Instead, I will post a chart of the NASDAQ TRIN, the counterpart to the NYSE TRIN that I discussed a couple of days ago. TRIN numbers can be calculated for each exchange. I watch the NASDAQ closely because the NASDAQ often leads the NYSE in terms of determining speculative sentiment.

In the chart below, I use 5 minute bars over a 10 day range. My thinking, in a nutshell, is not that I can guess what the FOMC minutes will reveal, nor even how the market will react to it, but I suspect that if the news is considered bullish by traders, the market will move much more decisively than if the news is considered to be bearish.

I consider this a contrarian sentiment play, with an asymmetrical news reaction magnitude potential. From a probability perspective, it’s about a 50% play; from an expectation perspective, I think the numbers are solidly in my favor.