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STATISTICS


Bond Bull Market Begins

08/19/11 12:20:29 PM
by Alan R. Northam

Statistical analysis shows that Treasury Bonds have now entered into a newly established long-term bull market trend.

Security:   TLT
Position:   N/A

The lower panel of Figure 1 shows the daily price bars for iShares Barclays 20+ Year Treasury ETF (TLT). This figure also shows the 200-day linear regression trendline (middle red 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 downtrend, statistical analysis shows that when price moves above its upper two sigma channel line, a warning is given that the long-term trend may be coming to an end.

Such a warning was given on June 15, which turned out to be false, as price moved back below the upper two sigma channel. On July 8, another warning was given that the bear market for TLT may be coming to an end. The reason why a violation of the two sigma channel line provides a warning and not an actual change in trend is that the linear regression slope indicator is still below its zero line and the R-squared indicators above its critical level.

On August 2, price closed below its lower three sigma channel line providing a signal that the bear market in Treasury bonds was coming to an end. Note that a crossing of the lower two sigma channel line provides a warning, but the crossing of the lower three sigma channel line is a signal that the trend is ending.

Looking at the linear regression slope indicator in the top panel of Figure 1, note that this indicator has moved above its zero line, indicating that the long-term trend has reversed from a bear market to a bull market. As long as this indicator remains above its zero line, the long-term statistical trend remains upward.

FIGURE 1: TLT, DAILY. This chart shows the daily price chart of the iShares Barclays 20+ Year Treasury ETF, 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, followed by the relative standard error index (RSEI).
Graphic provided by: MetaStock.
 
The next lower panel is that of the R-squared indicator. This indicator measures the strength of the current trend. When this indicator is above its critical level, it is an indication that the uptrend has statistical significance, meaning that there is a 95% confidence level that the uptrend will continue. As long as this indicator continues to move higher, the strength of the trend continues to strengthen. A reading of 0.8 or greater indicates a very strong trend. When this indicator is below its critical level, it indicates the trend has lost its statistical significance, meaning that there is no longer any confidence that the trend will continue. Note that on August 8, the R-squared indicator moved above the critical level, indicating that there is a 95% confidence level that the long-term uptrend will continue. Note that this indicator continues to move up, indicating that the long-term uptrend continues to strengthen.

The next lower panel of Figure 1 is that of the relative standard error index (RSEI). This index provides a measure of volatility. Low volatility is normally registered when the RSEI is below 0.2, which occurs during a strong trending rally. When the RSEI registers a reading of 0.8 or higher, it is an indication of extremely high volatility, which normally occurs just before a reversal in trend. Note that this indicator continues to move downward as the newly established long-term uptrend continues to strengthen, indicating that volatility is continuing to fall as the new uptrend continues to develop. A move below 0.2 will indicate extremely low volatility and signal that the trend has settled down into its rate of ascent.

In conclusion, this statistical analysis shows that the long-term uptrend in T-bonds has now been established. The R-squared indicator has moved above its critical level, indicating that the long-term uptrend is now statistically significant and getting stronger. Finally, the relative standard error index also shows that the newly established long-term uptrend in Treasury bonds continues to settle down into its defined rate of climb.



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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