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STATISTICS


Short-Term Look At The Dow

02/17/12 09:24:08 AM
by Alan R. Northam

This analysis shows that the Dow Jones Industrial Average is losing its upward momentum and looks to be in a topping process that could reverse its direction soon.

Security:   .DJI
Position:   N/A

Figure 1 shows the daily bar chart of the Dow Jones Industrial Average (DJIA) over the last 15 days. The blue line running through the middle of the chart is the 10-day linear regression line. This line is plotted approximately through the middle of the closing prices over the last 10 days by the least-square fit. This line acts as a short-term trendline and shows that over the last 10 days, the trend of the DJIA has been in the upward direction.

FIGURE 1: .DJI, DAILY. This chart shows the daily price chart of the DJIA in the bottom window along with the 10-day linear regression line. The diffusion index is shown in the top window, the linear regression slope indicator is shown in the second window, and the R-squared indicator is shown in the third window.
Graphic provided by: MetaStock.
 
The slope of this trendline can also be seen by the linear regression slope indicator shown in the second to the top window of the chart. This indicator shows that on February 2, the linear regression line started sloping upward. This indicates that the short-term trend reversed from a downtrend to an uptrend on this date. Note that from February 2 through February 9, this line continued to move upward, indicating that the linear regression trendline continued to steepen during this period. This is also an indicator of increasing momentum. Note also the linear regression slope indicator has been moving downward. This indicates that momentum has started to decelerate. Decelerating momentum normally occurs just before a reversal in trend.

The R-squared indicator in the third window is a measure of the strength of the trend. On February 7, this indicator moved above its critical level, indicating a strong trend. Note also that as of February 9, the strength of this short-term uptrend has also started to weaken, as noted by the R-squared indicator starting to move lower.

A trend in a security or a market index, such as the DJIA, is determined by the slope of the linear regression line. The strength of that trend is determined by the R-squared indicator. From the chart we see that the current short-term uptrend in the DJIA started on February 2 and became a strong trend on February 7. This same analysis is applied to all 30 Dow stocks and summed together as a diffusion indicator in the top window. This indicator shows that on February 9, only 22 of the 30 Dow stocks were in strong short-term uptrends. Two days later, this indicator shows that almost half of the 22 stocks either lost their upward strength or their short-term trends turned downward with only 12 stocks remaining in strong uptrends. Note that the direction of this indicator is in the downward direction, indicating that the number of Dow stocks losing their bullish strength or turning downward continues to fall.

This analysis shows that the short-term trend in the DJIA peaked on February 9 and is now losing upward momentum and strength. This analysis also shows that of the 30 Dow stocks, only 12 remain in strong upward short-term trends. This analysis further shows that the number of stocks in short-term uptrends continues to fall. As a result of this analysis, it appears that the DJIA is in a topping process that could reverse its direction within the next few days.



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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