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STATISTICS


Alcoa Bear Market Begins

08/31/11 09:12:41 AM
by Alan R. Northam

Long-term statistical analysis shows that Alcoa has entered into a primary bear market.

Security:   AA
Position:   N/A

The lower panel of Figure 1 shows the daily price bars of Alcoa (AA). This figure also shows the 200-day linear regression trendline (middle green line) along with the upper and lower two sigma and three sigma channel lines. In late July, Alcoa broke down below the lower two sigma channel line to warn of a possible reversal in trend from a long-term primary bull market to a primary bear market. Then in early August, Alcoa broke down below the lower three sigma channel line to signal a reversal in trend.

FIGURE 1: AA, DAILY. This chart shows the daily price chart of Alcoa in the lower panel along with its upsloping 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 followed by the R-squared indicator.
Graphic provided by: MetaStock.
 
Looking at the linear regression slope indicator in the top panel of Figure 1 shows us that this indicator is now below its zero line, indicating that the primary trend is now downward. This indicator crossed below its zero line 12 trading sessions after the breakdown of the lower three sigma channel line, marking the beginning of a new long-term primary bear market for AA.

The next lower panel shows the R-squared indicator that measures the confidence of the trend as well as its strength. This indicator has now moved above its critical level, indicating that there is a 95% confidence level that this new primary bear market trend will continue. Note that as long as this indicator continues to move upward, the newfound bear market trend will continue to strengthen.


Once a security has entered into a new bear market trend, we can redraw the linear regression and channel lines. Figure 2 shows a downsloping 200-day linear regression trendline along with its upper and lower two sigma and three sigma channel lines. Note that price has traded down to the lower two sigma channel line that is acting as temporary support. As the bear market trend continues to strengthen, price should push through this line of support and move lower.

FIGURE 2: AA, DAILY. This chart shows the daily price chart of Alcoa (AA) in the lower panel along with its downsloping 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, followed by the R-squared indicator.
Graphic provided by: MetaStock.
 
In conclusion, this statistical analysis shows that the primary bull market trend of AA has come to an end and a new primary bear market trend has been established. As long as the linear regression slope indicator continues to move downward and the R-squared indicator continues to move upward, the bear market trend will continue.



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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