|The lower panel of Figure 1 shows the daily price bars of the Travelers Cos. (TRV). This figure 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). Besides their statistical importance, the red channel lines represent resistance lines and the green channel lines support.|
|FIGURE 1: TRV, DAILY. This chart shows the daily price chart of the Travelers Cos. (TRV) 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.|
|Note in the bottom panel that price moved down to its lower three sigma channel line in early August, signaling a change in trend from a primary bull market to a primary bear market. The question might arise as to why the three sigma channel line signals a change in trend. The answer is that in statistics, 99.97% of the data that makes up the trend lies between the upper and lower three sigma channel lines. Therefore, any data that falls outside the three sigma channel line is considered to be a significant event and that significance represents a change in trend.|
Note also that at the end of August, the linear regression slope indicator moved below its zero line to indicate that the 200-day linear regression trendline (see Figure 2) is now sloping downward, indicating a change in the primary trend from up to down, or bullish to bearish.
Finally, in early September, the R-squared indicator moved above its critical level. In statistical analysis, a move above the critical level indicates a 95% confidence level in the trend.
Thus, the long-term statistical analysis indicates that the primary trend has now shifted from a bull market to a bear market with a 95% confidence level that the trend will continue.
|Figure 2 shows the downsloping 200-day linear regression trendline and its upper and lower channel lines representing the primary bear market trend. Note that price has found support at the -2 sigma channel lines. This support indicates that the selloff from May has run its course and TRV is now consolidating its losses. Once this consolidation process has completed, the next leg of the bear market will begin.|
|FIGURE 2: TRV, DAILY. This chart shows the daily price chart of the Travelers Cos. (TRV) 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.|
|Look at the linear regression slope indicator in the top panel -- note that it is below zero and sloping downward. This downslope indicates that price is accelerating in the downward direction. As long as this indicator continues to point down, the slope of the linear regression trendline and its associated channel lines in the bottom panel will continue to steepen in the downward direction, indicating that price has further to go on the downside. |
To arrive at a target price as to how high price will move in its countertrend consolidation, all we have to do is to look at the linear regression trendline (solid blue line). Once price moves significantly away from the linear regression trendline, price will regress back to the linear regression trendline. In addition, we have to realize that the linear regression trendline is dynamic in that during a strong downtrend, the linear regression trendline will continue to steepen. So in reality, what happens is that as price starts to move back up toward the linear regression trendline, the trend line itself is moving toward price so the two will actually meet somewhere in between.
In a very strong trend, price may actually turn back down before touching the linear regression trendline, and in a weaker trend, price may actually move slightly through the linear regression trendline. Noting how close price and the linear regression trendline comes together provides another way of looking at the strength of the trend. If the downtrend is extremely weak, price will move up through the +2 sigma channel line and warn of a possible trend change. However, this doesn't normally occur until the R-squared indicator has moved above 0.7, which is a long way from its current reading of 0.09.
|In conclusion, long-term statistical analysis shows the Traveler Cos. in a primary bear market trend. The analysis also shows that price is currently moving sideways to slightly upward as it consolidates its recent losses. Once this period of consolidation is complete, expect price to continue its primary bear market trend.|
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