The market is straining to find more sellers, and strained to make new lows. That's not to say it can't keep happening, but we're at levels where the bearish depth and bearish breadth aren't supporting one another. First things first though.

By breadth, we just mean the number of stocks that are moving higher on any given day relative to the number that are moving lower. Depth is just a reference to the degree of advancing and declining volume. In a normal environment, the ratio of advancers to decliners should roughly be the same as the ratio of 'up' volume to 'down' volume. Oh, and it's exchange-specific. The NYSE, AMEX, and NASDAQ each have their own TRIN readings. We like the NYSE's best.

Just to be clear, breadth and depth could both be overwhelmingly bullish or bearish, but as long as they were even or balanced, then a trend could persist. But, when volume and the numbers of advancing stock and declining stocks don't jive, then we may be near the beginning of an end.

The formula to calculate the ARMS Index is easy enough. The index is just a simple ratio of those proportions. If everything is balanced, the result is a reading of 1.0. When the market gets out of balance though, the reading shoots well past or well under 1.0. And, a correction of the imbalance becomes more likely. This is the aspect of TRIN we're interested in, when reversal pressure starts to kick in. Take a look at the calculation formula:

(# of Advancing Stocks / # of Declining Stocks)
divided by
(Volume of Advancers / Volume of Decliners Stocks)
= ARMS INDEX

So how do we interpret TRIN data? The raw data itself is too erratic to use; instead we want to use moving averages of the data, so we can spot a trend, or at least an oversold/overbought situation. In fact, we use three moving averages -- a short-term, an intermediate-term, and a long-term average. Each appropriately spots likely reversal pressure for its respective timeframe. Sorry, we can't give you all the details, but we can show you the current charts of each.

Here's the short-term chart. The NYSE TRIN data is completely hidden; we're only interested in the moving average. In fact, we're really only interested in the moving average when it moves above 1.3 (oversold), and under 0.8 (overbought). All those instances are marked with a green or red arrow, respectively.

A perfect indicator? No, but a pretty good one. My biggest concern right now -- for the short term chart anyway -- is that when it fails, it really fails badly. Take the September buy signal for instance. Of course, the situation was corrected pretty quickly with a sell signal a few days later - before the implosion.

S&P 500 with short-term moving average of NYSE TRIN


Right now we can see one thing very clearly. The short-term TRIN average says we're very oversold, and ripe for a bounce. However, I'm writing this not to point out how wonderful TRIN is to use, but rather how problematic it's capable of being. Just because we're oversold doesn't mean we're going to bounce right now, or bounce very far.

So, here's the lesson: at least for the short-term chart, in a normal, low-volatility environment, I still find the short-term TRIN information to be very effective. In this environment though, there's no telling when we'll pull out of this funk.

Perhaps there's more use out of longer-term data. Let's start with an intermediate-term moving average of TRIN.

Right off the bat we can see a more useful chart. There are fewer signals (overbought/oversold), but the ones we get have the tendency to be more accurate.

S&P 500 with intermediate-term moving average of NYSE TRIN


The key problem still exists on the intermediate-term chart. It could take a while for the reversal to kick in, if it kicked in.

And now, the long-term chart. Clearly, there are very few cases here where the long-term moving average gave any kind of overbought/oversold signal, but each one was pretty good, though the last buy signal has yet to play out.

S&P 500 with long-term moving average of NYSE TRIN


Bottom line is I'm still not convinced the final bottom has been out in yet, but there's a clear imbalance in breadth and depth, There has been for a while. This creates enormous bullish potential, if history persists, and I think it will eventually.

Timing is still the key though - when will the potential turn into reality? Good question, but I want to stand ready for when it is because I think it could be relatively soon. But what about the economy? What about poor fundamentals? Yeah, I hear all that. Here's a dose of reality though -- the market only trades ion fundamental when it's convenient for investors to do so. It's either that, or the definition of 'reasonable valuation' is always changing. Besides, there were some huge reversals made in the past at a point in time when fundamentals stunk as bad as they do now, and many of them were spotted by an imbalanced TRIN reading.

Aside from January of this year, the last times we saw the three TRIN moving averages above simultaneously this oversold was June of '04, March of '03, and July of '02. We also saw this situation in October of '87, October of '74, and May of '70. October of '66 was close, as was June of '62. Though some of those instances took longer than others to get the bullish party started, once they did it was a very nice, and very long, rally. Patience, it'll happen.

Price Headley is the founder and chief analyst of BigTrends.com.