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STATISTICS


Major Market Trend Down

12/09/11 08:59:41 AM
by Alan R. Northam

This analysis shows that the major trend of the stock market remains downward but is currently undergoing a corrective rally.

Security:   .DJI
Position:   N/A

Figure 1 shows the daily price bars of the Dow Jones Industrial Average (DJIA) in the bottom panel along with the 200-day linear regression trendline and its associated upper and lower channel lines. The linear regression slope indicator is shown in the top panel and the R-squared indicator in the middle panel.

The bottom panel shows the 200-day linear regression trendline (solid blue line) in a downsloping direction, indicating that the long-term trend of the DJIA is downward. Note that in late September, price moved above the linear regression trendline and rallied up to the upper 1 sigma channel line, where it made three attempts to break out above this level before returning to the linear regression trendline.

In early December, price once again mounted a rally that managed to break out above the upper 1 sigma channel line but is struggling to stay above it. It is still possible that this rally will give up and price will once again move back to the linear regression trendline. Also note that should price continue to move higher, it will soon run into resistance from the upper 2 sigma channel line at around 12500.

FIGURE 1: .DJI, DAILY. This chart shows the daily price chart of the DJIA in the lower panel along with its downsloping 200-day linear regression trendline, and its associated channel lines. The top panel shows the 200-day linear regression slope indicator followed by the R-squared indicator in the middle panel. This figure shows the DJIA in a long-term bear market trend.
Graphic provided by: MetaStock.
 
Figure 2 shows the daily price bars of the DJIA in the bottom panel along with the 50-day linear regression trendline and its associated upper and lower channel lines. The linear regression slope indicator is shown in the top panel and the R-squared indicator in the middle panel.

The bottom panel shows the 50-day linear regression trendline (solid blue line) in an upsloping direction, indicating that the intermediate-term trend of the DJIA is upward. Note that from September through December, price was able to move up to the upper 1 sigma channel line, whereas it was also able to move down to the lower 2 sigma channel line. This asymmetry is reflective of a negative or bearish bias. Further, note that the most recent rally is struggling to move back up to the linear regression trendline, another sign of negative bias. This negativity is reflective of a corrective rally rather than a bullish rally.

FIGURE 2: .DJI, DAILY. This chart shows the daily price chart of the DJIA in the lower panel along with its downsloping 50-day linear regression trend ine, and its associated channel lines. The top panel shows the 50-day linear regression slope indicator followed by the R-squared indicator in the middle panel. This figure shows the DJIA in a countertrend corrective rally.
Graphic provided by: MetaStock.
 
Figure 3 shows the daily price bars of the DJIA in the bottom panel, along with the 10-day linear regression trendline and its associated upper and lower channel lines. The linear regression slope indicator is shown in the top panel and the R-squared indicator in the middle panel.

The bottom panel shows the 10-day linear regression trendline (solid blue line) in an upsloping direction, indicating that the short-term trend of the DJIA is upward. Note that over the last two weeks, price has traded between the upper and lower 1 sigma channel lines, indicating a strong short-term uptrend. The only problem with strong trends is that they don't last very long.

The R-squared indicator is currently reading 0.87, indicating a very strong trend, and that this indicator is in the process of rolling over, as is the linear regression slope indicator. These are signs that the short-term trend has run its course and is aging.

FIGURE 3: .DJI, DAILY. This chart shows the daily price chart of the DJIA in the lower panel along with its downsloping 10-day linear regression trendline, and its associated channel lines. The top panel shows the 10-day linear regression slope indicator followed by the R-squared indicator in the middle panel. This figure shows the DJIA in a short-term bullish rally.
Graphic provided by: MetaStock.
 
The long-term trend remains downward and rallies counter to it should be considered corrective. The intermediate-term trend is in an upward direction, running counter to the long-term trend, and is considered corrective. The short-term trend is also upward, running in the same direction as the intermediate-term trend, indicating that the intermediate-term trend remains upward. Once the short-term trend turns back downward, the intermediate-term uptrend should also break down and the long-term trend will continue to move lower.



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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