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United Technologies Becomes A Strong Bull

04/27/11 03:58:23 PM
by Alan R. Northam

Statistical analysis is used to show that United Technologies has graduated from a weak bull to a strong one, but danger could lay ahead.

Security:   UTX
Position:   N/A

In a recent article entitled "Exxon Mobil Topping?" I showed a table of the status of the 30 Dow Jones Industrial Average (DJIA) stocks. In that table I showed which stocks were in statistically strong bull trends based upon their most recent 50-day price points, which were topping, which were in weak bear trends, and which were in strong bear trends. In reality, the category listing those stocks topping included both bullish stocks that are in topping phases and those bullish stocks that were in weak bull markets. So perhaps I should have labeled this category "weak bullish" to be more correct. In the list of stocks in the "Topping" category is United Technologies (UTX). Today, UTX graduated to the list of those stocks in the category of "strong bullish." Let's take a look at the statistical analysis.

The lower panel of Figure 1 shows the 50-day bar chart of UTX. In this panel is also shown the linear regression trendline (middle green line) and its upper and lower three sigma channel lines. I show the three sigma channel lines instead of the two sigma channel lines because the relative standard error index (RSEI) shows extreme volatility, and as such, price is expected to move further away from the middle linear regression line before returning back to it. Note that in mid-March, the price of UTX moved down to the lower three sigma channel line. Since stocks generally have a normal distribution, it is now expected that UTX will move up to the upper three sigma channel line before returning to the middle linear regression trendline.

FIGURE 1: UTX, 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 shows that it has bounced off its zero line twice over the last month. This is an indication that the bulls are stronger than the bears, as a move below the zero line would have reversed the 50-day trend of the linear regression line. Note that this indicator is now moving in an upward direction. As long as this indicator continues to move upward, the slope of the linear regression trendline and the upper and lower three sigma channel lines will continue to increase, indicating that price is accelerating upward at a faster and faster pace.

The R-squared indicator is a measure of the strength of the trend. Note that this indicator has just moved above its critical level. This is the signal that turned UTX from a weak bull to a strong one. When this indicator moves above its critical level, statistically, this indicates that there is now a 95% probability that the upward rally will continue.

Allow me to say this: As long as the slope of the linear regression line remains shallow and price keeps bouncing off the channel lines, UTX will continue to remain in a topping stage. In order for UTX to rally significantly higher, the linear regression line needs to steepen and price needs to closely follow the linear regression line.

The relative standard error index (RSEI) is a measure of volatility. In late February, 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 ahead.

In conclusion, price is now starting to accelerate higher as the upward trend in UTX has become statistically strong, meaning that there is now a 95% probability that the uptrend will continue. However, volatility also remains extremely high, indicating that UTX could be in a topping stage. In order for UTX to move significantly higher from here, the relative standard error index needs to start falling, the R-squared indicator needs to continue to move upward, and the linear regression slope indicator needs to continue to move upward. If these things do not occur, then UTX could find itself in trouble later on down the road.

How to trade UTX: Armed with this statistical analysis of the intermediate-term trend, the trader can now use his or her favorite traditional technical indicators to make a trade decision.




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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