INDICATORS

The Thrust Oscillator

Find Those Market Tops

by David Hawkins

When is a rally just a rally, and when is it the end of a bear market?

The long-term bear market that started in the year 2000 has been punctuated by several intermediate-term rallies, each of which, so far, has failed to bring down the bear. When you're within such a rally, you don't know if it is the end of the long-term bear or if it's just another intermediate-term rally that will fail. You need an indicator, something that will give a signal when a rally is running out of steam and is getting ready to roll over.

THE THRUST OSCILLATOR

The idea for such an indicator came while I was perusing Tushar Chande's STOCKS & COMMODITIES article "Market Thrust," in which he introduced the thrust oscillator (TO). The oscillator is his improvement on the Arms index (also called the TRIN). I thought that if the TO works better than the TRIN, then perhaps a moving average of it will show a bearish divergence with the market when an intermediate-term rally is topping out and getting ready to turn down.

The Arms index uses market breadth data to calculate an indicator of underlying strength (or weakness) in the market. Breadth data is represented by: 

AI = # of advancing issues
AV = the volume of the advancing issues
DI = # of declining issues, and
DV = the volume of the declining issues.

The Arms index (Trin) is defined as the ratio of two ratios:
Trin = (AI/DI) / (AV/DV)

The TRIN is neutral at 1, becomes bullish moving from 1 down toward zero, and is bearish when moving in the positive direction above 1.

Chande noted several difficulties with TRIN. First, it is asymmetric: The bullish range is bounded, extending from 1 down to zero, but the bearish range is unbounded, going from 1 on up without limit. Second, the bullish and bearish directions of the Trin are the opposite of what you would expect.

  ...Continued in the July 2003 issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the July 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.


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