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LINEAR REG CHANNEL


Commodity Market Ready For A Correction

12/22/10 09:43:45 AM
by Alan R. Northam

Statistical analysis is used to show that the commodity market remains in a long-term uptrend, but that it is ready to correct for its recent gains.

Security:   DJP
Position:   N/A

Figure 1 shows the long-term analysis of the iPath Dow Jones UBS Commodity ETF (DJP). On the price chart, shown in the lower panel, is plotted the 200-day linear regression line along with its upper and lower channel lines in green. This chart shows that the DJP is in a long-term uptrend. It also shows that in November price bounced off the linear regression line and is now headed toward and is getting close to overhead resistance provided by the upper linear regression channel line.

The linear regression slope indicator continues to move higher, indicating that price is accelerating upward. This suggests that price will continue to move upward in the future.

The R-squared indicator is also moving upward, indicating that the long-term uptrend continues to strengthen.

Note, however, that the standard error indicator is above its 200-day simple moving average. This is an indication of the above-average volatility. In addition, note that volatility is now higher than it has been since the beginning of 2010. High volatility normally indicates a change in trend ahead. Therefore, the standard error indicator is warning traders that a possible change in the long-term trend lies ahead.

The long-term analysis shows that commodities remain in a strong uptrend. As confirmation of this analysis, I have shown that the 200-day simple moving average of price is also moving upward.

FIGURE 1: DJP, DAILY. This chart shows the 200-day linear regression channel on the price chart in the bottom panel, the linear regression slope indicator in the top panel, the R-squared indicator in the second panel, and the standard error indicator in the third.
Graphic provided by: MetaStock.
 
Figure 2 is that of the intermediate-term analysis of DJP. On the price chart in the bottom panel is plotted the 50-day linear regression channel (green bold lines). In addition, I show the linear regression channel extension lines (green dotted lines). This chart shows that over the intermediate term, DJP is in an uptrend. This is also confirmed by price being above its 50-day simple moving average and that this moving average is also moving upward.

This chart also shows that price broke down below the lower linear regression channel line, indicating a change in the intermediate-term uptrend. However, this does not mean that a new intermediate-term downtrend is under way. A change in trend can mean a sideways trading range or a new more shallow uptrend. More evidence is still needed to determine what the next intermediate-term trend will be.

Looking at the linear regression slope indicator, note that it is well off its peak. This is an indication that price is now in a deceleration phase. Price deceleration normally occurs just before a change in trend.

The R-squared indicator is also moving downward, indicating a weakening intermediate-term trend.

The standard error indicator is now at very high levels, indicating high volatility. High volatility indicates a change in trend in the making.

The intermediate-term analysis indicates that the intermediate-term uptrend is very mature and a change in the intermediate-term trend lies ahead.

FIGURE 2: DJP, DAILY. This chart shows the 50-day linear regression channel on the price chart in the bottom panel, the linear regression slope indicator in the top panel, the R-squared indicator in the second panel, and the standard error indicator in the third.
Graphic provided by: MetaStock.
 
In conclusion, over the long term, the commodity market continues to strengthen, indicating that it has much further to go on the upside. However, over the intermediate term, the commodity market looks like it is setting itself up for a correction. I would therefore expect to see the DJP move lower to at least the 200-day linear regression line before moving significantly higher.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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Date: 01/04/11Rank: 4Comment: 
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