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STATISTICS


Procter And Gamble Bull Market Ends

08/10/11 08:37:40 AM
by Alan R. Northam

Long-term statistical analysis shows that the bull market for Procter and Gamble has come to an end.

Security:   PG
Position:   N/A

The long-term statistical analysis of the individual securities that make up the Dow Jones Industrial Average (DJIA) shows that five of these securities are currently in long-term primary bear markets include Bank of America, Cisco Systems, Hewlett-Packard, Microsoft, and Walmart. On August 2, Procter and Gamble signaled the end of its bull market run but has not yet become a bear.

The lower panel of Figure 1 shows the 200-day price bars of Procter and Gamble (PG). This figure also shows the linear regression trendline (middle green line), the upper and lower two sigma channel lines and the upper and lower three sigma channel lines. In the case of a long-term uptrend, statistical analysis shows that when price moves below its lower two sigma channel line, a warning is given that the long-term trend may be over. Such a signal was given in March 2011. This signal turned out to be false as price turned back upward into the upper and lower two sigma channel and continued to rally upward. In late July, another warning was given that the bull market for Procter and Gamble may be over. This was a more valid warning as the linear regression slope indicator was much closer to crossing below its zero line and the R-squared indicator was much closer to crossing below its critical level.

On August 2, price closed below its lower three sigma channel line, signaling the end of the bull market run for Procter and Gamble. Note, a crossing of the lower two sigma channel line is a warning, but the crossing of the lower three sigma channel line is a signal.

FIGURE 1: PG, DAILY. This chart shows the daily price chart of Procter and Gamble in the lower panel along with the 200-day linear regression trendline and its upper and lower two and three sigma channel lines. The top panel shows the linear regression slope indicator, the next lower panel the R-squared indicator, and followed by the relative standard error index (RSEI).
Graphic provided by: MetaStock.
 
Looking at the linear regression slope indicator in the top panel of Figure 1, we see that this indicator has not yet moved below its zero line. As long as this indicator remains above its zero line, the long-term trend statistically remains upward. This is why the crossing of the lower three sigma channel line is a signal that the bull market for Procter and Gamble has ended but it is not a confirmation that the bull market has ended. The actual confirmation that the bull market has ended occurs when the linear regression slope indicator moves below its zero line. The crossing of this indicator to below its zero line actually indicates that the long-term uptrend has now reversed to a long-term downtrend.

The next lower panel shows the R-squared indicator. This indicator measures the strength of the current trend. When this indicator is above its critical level and moving upward, it signals that the current trend is strong and getting stronger. When this indicator is below its critical level, it indicates that the current trend has lost its strength. Statistically, we say that the trend no longer has any statistical significance. Note that on August 2, the R-squared indicator moved below this critical level and indicates that there is no longer any strength to the current long-term uptrend. This condition leaves the current trend vulnerable for a reversal and occurs just before a change in trend. Can the long-term trend continue, even though its current condition states that it has no significant strength? Yes, and this does occur from time to time, but the higher probability is that a reversal in trend will most likely occur.

A quick note about the relative standard error index in the next lower panel of Figure 1: This indicator moved above its 0.8 level in April 2011. This high level is an indicator of extremely high volatility. Extreme volatility normally occurs just before a reversal in trend. Thus, this indicator has been warning of a possible reversal in the long-term trend of PG since April. On the other end of the scale, a reading below 0.2 indicates extremely low volatility. Extreme low volatility occurs during a strong trend and indicates that the current trend will most likely continue.

In conclusion, the long-term statistical analysis of Procter and Gamble has signaled the end of its bull market trend. However, a long-term bear market trend has not yet developed. Confirmation that the bull market is over should come, once the linear regression slope indicator moves below its zero line, indicating that a new long-term bear market trend has begun. Should a new bear market trend develop, it will become statistically significant once the R-squared indicator moves back above its critical level. Until a new statistically significant bear market trend develops we should be on guard for a possible, although slim, recurrence of the bull market of Procter and Gamble.



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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