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STATISTICS


NASDAQ Enters Bear Market

09/16/11 12:20:17 PM
by Alan R. Northam

Statistical analysis is used to show that the NASDAQ Composite index is in a primary bear market but is currently undergoing a countertrend rally.

Security:   .IXIC
Position:   N/A

The lower panel of Figure 1 shows the daily price bars of the NASDAQ Composite Index (.IXIC). This figure also shows the 200-day linear regression trendline (solid blue line) along with the upper one sigma channel line (red dotted line), the upper two sigma channel line (red solid line), the lower one sigma channel (green dotted line), the lower two sigma channel line (solid green line), and the lower three sigma channel line (dashed green line). The red channel lines represent resistance lines and the green channel lines represent support.

FIGURE 1: .IXIC, DAILY. This chart shows the daily price chart of the NASDAQ Composite (.IXIC) in the lower panel along with its 200-day linear regression trendline and its channel lines. The top panel shows the linear regression slope indicator followed by the R-squared indicator in the next lower panel.
Graphic provided by: MetaStock.
 
Figure 1 shows the linear regression line along with its upper and lower channel lines sloping downward, indicating that the primary trend of the NASDAQ has shifted from a bull market trend to a bear market trend. This reversal in trend is also seen by the linear regression slope indicator in the top panel of Figure 1. As can be seen, this indicator has recently moved below its zero line to signal the beginning of a primary bear market. As long as this indicator continues to move down, it will indicate that price momentum is continuing to accelerate downward.

The R-squared indicator shown in the next lower panel of Figure 1 shows that it has recently moved above its critical level. This indicator measures two things: It measures the confidence of the trend as well as its strength. When this indicator moves above its critical level, it is an indication that there now exists a statistical 95% confidence level that the downtrend will continue. In addition as long as the R-squared indicator continues to rise, it is an indication that the trend is continuing to strengthen.

Figure 2 shows the upward rally taking place since mid-August. Since the primary trend is now downward, this rally is considered a countertrend rally that is correcting for the selloff that has taken place since early July.

The bottom panel of Figure 2 shows the daily price bars of the NASDAQ Composite index along with the upsloping 20-day linear regression trendline and its upper and lower channel lines, indicating that the NASDAQ is in a short-term uptrend.

In the top panel of Figure 2 is the linear regression slope indicator. This indicator is currently above its zero line and moving higher. The crossing of the linear regression slope indicator above the zero line signals the beginning of the short-term uptrend. That the linear regression slope indicator continues to move upward is an indication that the momentum of the upward rally continues to accelerate.

The next lower panel of Figure 2 shows the short-term R-squared indicator. This indicator has recently moved above its critical level, signaling that there is a 95% confidence level that the short-term uptrend will continue.


FIGURE 2: .IXIC, DAILY. This chart shows the daily price chart of the NASDAQ Composite (.IXIC) in the lower panel along with its 20-day linear regression trendline and its channel lines. The top panel shows the linear regression slope indicator followed by the R-squared indicator in the next lower panel.
Graphic provided by: MetaStock.
 
The short-term statistical analysis shown in Figure 2 indicates that the short-term trend is now in the upward direction and is continuing to strengthen. The short-term analysis also indicates there is a 95% confidence level that the short-term uptrend will continue. To indicate a possible target for the completion of this short-term countertrend upward rally, I have added the 200-day linear regression trendline shown in Figure 1 to the chart in the bottom panel of Figure 2. Since the primary trend is now downward with a 95% confidence level that the primary downtrend will continue, and since the primary downtrend is continuing to accelerate downward, the countertrend rally should regress back to the 200-day linear regression trendline, reverse directions, and continue its downtrend.

In conclusion, long-term statistical analysis shows that the primary bull market trend NASDAQ Composite index has come to an end and a new primary bear market trend has begun. As long as the 200-day linear regression slope indicator continues to move down below its zero line and the 200-day R-squared indicator continues to move up, the bear market trend will continue to move price lower once the short-term countertrend corrective rally has completed its course.



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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