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STATISTICS


DJIA Trend Reversal In Progress

04/12/11 08:40:24 AM
by Alan R. Northam

Statistical analysis is used to show that the Dow Jones Industrial Average is currently in the process of reversing its trend.

Security:   .DJI
Position:   N/A

The lower panel of Figure 1 shows the 50-day bar chart of the Dow Jones Industrial Average (DJIA) along with the linear regression trendline (middle green line) and its upper and lower two sigma channel lines. Note that the linear regression trendline and its channel lines continue to point in an upward direction, but also note the very shallow upslope. This is an indication that over the last 50 trading sessions, the DJIA has made very little upward progress.

FIGURE 1: .DJI, DAILY. This chart shows the daily price chart in the bottom panel along with the 50-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 illustrates what has been happening to the slope of the trend. Up until mid-February, the linear regression slope indicator had been moving in an upward direction, indicating an accelerating uptrend. However, in mid-February this indicator starting moving in a downward direction, indicating deceleration in the uptrend.

Note that price deceleration normally occurs just prior to a change in trend.

The R-squared indicator is a measure of the strength of the trend. Up until mid-February, this indicator was also moving in an upward direction, indicating a strengthening trend. However, in mid-February it too started to move in a downward direction, indicating a weakening trend. In late March, this indicator moved below its critical level, indicating that the uptrend of the DJIA had weakened to the point that there was no longer a significant uptrend.

The relative standard error index (RSEI) is a measure of volatility. In early March, this index moved above 0.8, indicating extremely high volatility. In statistical analysis of stock market trends, high volatility normally occurs at market turning points. Thus, the RSEI is warning of a change in trend.

In conclusion, price has been decelerating since mid-February; there is no longer a significant uptrend, and volatility is extremely high. These indicators all indicate that a reversal in trend is in progress. To complete the reversal process, the linear regression slope indicator must still move below its zero line, and the R-squared indicator must move back above its critical level. Confirmation of the change in trend will occur once the relative standard error index moves back below its 0.2 level, indicating a low level of volatility. If these following steps are not completed, then the DJIA will have escaped a trend reversal.




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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