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STATISTICS


QQQQ To Move Lower

03/15/11 08:49:04 AM
by Alan R. Northam

Statistical analysis of the technology market sector shows that QQQQ is ready to move lower.

Security:   QQQQ
Position:   N/A

Figure 1 shows the long-term picture of the technology market sector as measured by the PowerShares QQQ Trust (QQQQ). The bottom panel shows the daily trading bars along with the 200-day linear regression trendline and its +/-2 sigma channel lines. As long as the daily price bars remain inside these upper and lower channel lines, the QQQQs will remain in a long-term uptrend. The breakdown below the lower channel line would signal a major trend reversal.

FIGURE 1: QQQQ, DAILY. This chart shows the daily price chart in the bottom panel along with the 200-day linear regression trendline and its upper and lower channel lines, the linear regression slope indicator in the top panel, the R-squared indicator in the second panel, and the relative standard error index in the third.
Graphic provided by: MetaStock.
 
The linear regression slope indicator in the top panel has been above its zero line since June 2009, indicating a long-term uptrend in progress. However, this indicator looks to be in the very early stage of rolling over. Should the linear regression slope indicator roll over and start to move in the downward direction, it will signal that the long-term uptrend is starting to decelerate warning of a possible correction ahead or even a major trend reversal.

The R-squared indicator is shown in the second window from the top. This indicator is reading 0.9 on a zero to one scale, indicating a very strong uptrend in progress. This indicator also looks to be in the very early stage of rolling over to the downside. Should the R-squared indicator roll over and start pointing downward, it will be an indication that the long-term uptrend is starting to weaken.

The third window from the top shows the relative standard error index (RSEI). This index is currently below 0.2, indicating low volatility. Low volatility normally occurs during a healthy trend. It is when volatility spikes upward to a high level that trend reversals normally occur. Thus, this indicator shows no sign of an upcoming trend reversal.

The long-term statistical analysis shows that the QQQQs remain in a strong long-term uptrend. The analysis also warns of either a correction ahead or a major trend reversal. However, until the relative standard error index spikes above 0.8, the analysis leans toward a correction and not a major trend reversal. Tip: A major trend reversal is signaled once the daily price bars move below the lower linear regression channel line.

Figure 2 shows the QQQQs over the intermediate term. The bottom panel shows the daily price bars along with the 50-day linear regression trendline and its +/- 2 sigma channel lines. Note that the daily price bars have moved below the lower channel line, signaling an intermediate-term reversal in trend from up to down. However, this trend reversal has not yet been confirmed by its three indicators: the linear regression slope indicator, the R-squared indicator, and the relative standard error Index.

 
The top panel shows the 50-day linear regression slope indicator. This indicator has been above its zero line since July 2010, indicating an intermediate-term uptrend in progress. However, the linear regression slope indicator peaked in early November 2010 and has been moving lower since signaling price deceleration. Price deceleration is an indication that upward rally is in its terminal stage. A move below its zero line will confirm the reversal in trend from up to down.

The next lower panel is the R-squared indicator. This indicator is a measure of the strength of the trend. Note that this indicator has formed and completed a double top and is now in a downtrend. This indicates that the strength of the intermediate-term uptrend is now weakening. A move below its critical level will signal that there is no longer a significant intermediate-term uptrend. A move back above the critical level will then signal a significant downtrend, confirming the trend reversal.

The third window down shows the relative standard error index over the intermediate-term trend. This index is currently at an extreme high level warning that a reversal in trend from up to down could lay ahead. Tip: The first sign of an upcoming trend reversal is normally given when the relative standard error index moves from below 0.2 to above 0.8. A move back below its 0.2 level will confirm the trend reversal.

The intermediate-term statistical analysis shows that the QQQQs have now reversed direction from an uptrend to a downtrend. This new trend, however, remains unconfirmed. Confirmation will come when the linear regression slope indicator moves below its zero line, the R-squared indicator moves below its critical level and then back above it, and the relative standard error index moves below its 0.2 level.

Figure 3 shows the short-term trend of QQQQ. On the price chart, in the bottom panel, I have shown the 20-day linear regression trendline along with its +/- 2 sigma channel lines. The linear regression trendline is currently pointing down, indicating that the short-term trend is down.


FIGURE 3: QQQQ, DAILY. This chart shows the daily price chart in the bottom panel along with the 20-day linear regression trendline and its upper and lower channel lines, the linear regression slope indicator in the top panel, the R-squared indicator in the second panel, and the relative standard error index in the third.
Graphic provided by: MetaStock.
 
The top panel of Figure 3 shows the linear regression slope indicator. This indicator is below its zero line, indicating that the trend is in the downward direction. This indicator also continues to move lower, indicating that price continues to accelerate in the downward direction. Tip: Price acceleration is an indication that a trend still has further to go.

The next lower panel shows the R-squared indicator. This indicator is currently above its critical level, indicating a significant downtrend in play with a 95% probability of continuing. This indicator also continues to move upward, signaling that the downtrend continues to strengthen.

The third panel from the top of Figure 1 shows the relative standard error index. This index is currently moving in a downward direction. A move below 0.5 will signal below-average volatility and a move below 0.2 level will signal low volatility. Tip: Low volatility is an indication that the trend has further to go.

The short-term statistical analysis shows the QQQQs in a strong short-term downtrend that will most likely continue.


In conclusion, this statistical analysis of the PowerShares QQQ Trust shows that over the long term, the QQQQs remain in a long-term uptrend. However, the intermediate-term analysis shows that price has reversed downward. The short-term analysis also confirms price to be in a downtrend. Note that major trend reversals take a long time to confirm, and therefore we use intermediate-term trends and short-term trends to signal possible major trend reversals. Confirmation of a major trend reversal, from up to down, will come once price breaks down below the 200-day linear regression minus two sigma channel line. If a major trend reversal is not to take place, then price should find support and reverse back upward. The most likely areas of support would be either the 200-day simple moving average or the 200-day linear regression lower channel line.



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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