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A Statistical Look At The QQQQ01/26/11 09:13:21 AM
by Alan R. Northam
Statistical analysis is used to show the short-term trend of the technology market sector.
|Figure 1 shows the short-term picture of the Power Shares exchange traded fund (ETF) (QQQQ). The bottom window of Figure 1 shows the daily trading bars along with the 20-day linear regression line and its upper and lower channel lines. Note that the regression line shows that the short-term trend of the technology market sector remains in an uptrend.|
|FIGURE 1: QQQQ, DAILY. This chart shows the daily price chart of Power Shares ETF QQQQ in the bottom window along with the 20-day linear regression line and its upper and lower channel lines, the linear regression slope indicator in the top window, the R-squared indicator in the second window, and the relative standard error indicator in the third.|
|Graphic provided by: MetaStock.|
|The linear regression slope indicator can be found in the top window. This indicator is basically a momentum indicator, but it also shows the direction of the trend. When the indicator is above its zero line, it shows that the trend is up and when the indicator is below its zero line, it shows that the trend is down. The linear regression slope indicator is now pointing down and is below its nine-day simple moving average. This is an indication that price momentum has started to decelerate. Price deceleration normally occurs near the end of a trend and is a warning that the trend is nearing a reversal.|
|The R-squared indicator is shown in the second window from the top. This indicator is an indication of the strength of the trend. When the R-squared indicator is above its critical level, it is an indication that the trend is significantly strong and that there is a 95% probability that the trend will continue. Note that this indicator has been indicating a strong trend for the Qs since mid-December. However, short-term trends are just that, short term, and this one is now aging. This aging can be seen in that the R-squared indicator is now starting to head toward its critical level. A move below the critical level will indicate the lack of a significant trend.|
|The third window from the top shows the relative standard error indicator. This is an indicator that I developed to quantify the normal standard error indicator. This indicator can move between zero and one. When this indicator is above 0.8, it indicates high volatility. When it is between 0.8 and 0.5, it indicates above-average volatility. Below 0.5 and above 0.2, it indicates below-average volatility, and below 0.2, low volatility. Currently, volatility is extremely high. The normal progression of a reversal in trend starts with high volatility followed by a lack of a significant trend followed by a reversal in trend. The first thing that occurs before a reversal in trend is for the relative standard error indicator be moved to a high level, followed by the R-squared indicator moving below its critical level, followed by the linear regression slope indicator moving to the other side of its zero line.|
|In conclusion, the statistical analysis of the Power Shares QQQQs shows that over the short term, there is a high probability that the technology market sector may be very close to a reversal in trend.|
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 firstname.lastname@example.org or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.
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