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STATISTICS


Pfizer In Statistical Analysis

03/12/12 12:51:54 PM
by Alan R. Northam

Statistical analysis is used to show that Pfizer is in the process of reversing its intermediate-term trend from up to down.

Security:   PFE
Position:   N/A

This article is a followup to the article entitled "Pfizer Is Turning Down" published March 5, 2012. In that article, it was shown that Pfizer was in the process of turning down but had not yet done so. The article went on to explain there were two methods used in statistical analysis to show when a trend had changed directions.

One method explained that a trend change occurred when the linear regression slope indicator moved across its zero line in addition to the R-squared indicator moving above its critical line, which occurred on February 27, 2012, as shown by the blue arrows on the chart.

The second method shown was to plot the linear regression channel and look for price to close below the lower three sigma channel line, which did not occur as shown by the gray arrow. The article went on to explain that when both methods show that a reversal in trend occurred, the two methods confirm each other. The article further explained that when one or the other of the two methods did not show that the trend had reversed, it was considered to be a divergence that could indicate that a trend reversal may not take place. Here's a followup to explain what to do when there is a divergence.

Figure 1 shows the daily bar chart of the Pfizer (PFE) in the bottom window. The upsloping blue line running through the middle of the price bars is the 50-day linear regression line representing the intermediate-term trend. This chart also shows the minus 3 sigma channel line (upsloping dashed green). The top window shows the linear regression slope indicator and the middle window, the R-squared indicator. The chart also shows a series of colored downsloping lines, which will be discussed later.

FIGURE 1: PFE, DAILY. This chart shows the daily price chart of Pfizer (PFE) in the bottom window along with two sets of 50-day linear regression lines and their associated channel lines. The linear regression slope Indicator is shown in the top window, and the R-squared indicator is shown in the middle window.
Graphic provided by: MetaStock.
 
On February 27, 2012, the 50-day linear regression slope indicator had moved below its zero line and the 50-day R-squared indicator had moved above its critical level, signaling a reversal in the intermediate-term trend of Pfizer from up to down. However, price did not move below its lower 3 sigma channel line (see gray upward pointing arrow), indicating a divergence. Note that on February 27, price opened at the lower 3 sigma channel line, but then trading upward throughout the day. Note also that during the following six trading days, Pfizer continued to move upward along the lower 3 sigma channel line. Note further that the 3 sigma channel line is acting as a line of support. So how do you handle such a situation?

The first thing we want to do is add a downsloping 50-day linear regression line and its associated channel lines. Note that during the past 50 days, price has moved between the upper 2 sigma channel line and the lower 2 sigma channel line. Price moved up to the upper 2 sigma channel line of January 17 and the lower 2 sigma channel line on February 2 and February 7.

Price will move between these two channel lines 95% of the time. Note that price has now moved back above the upper 1 sigma channel line. Once price breaks through one line of resistance (the upper 1 sigma channel line), price usually moves to the next line of resistance (the upper 2 sigma channel line). Thus, we should expect price to move up to the upper 2 sigma channel line and then turn down. Following this turndown, we should expect price to break down below the upsloping green dashed lower 3 sigma channel line to nullify the divergence and complete the reversal downward.

What happens if price does not reverse downward after moving up to the downsloping solid red 2 sigma channel line? Should price happen to break out above the downsloping 2 sigma channel line, which acts as a line of resistance, we should expect price to continue higher to the next level of resistance, which is the red dashed downsloping 3 sigma channel line before turning back downward.

However, a breakout above this upper 3 sigma channel line along with the linear regression slope indicator moving back above its zero line and the R-square indicator moving back above its critical level would signal a continuation of the intermediate-term uptrend. However, before any of this can occur, the R-squared indicator must move back below its critical level.

So as long as the R-squared indicator remains above its critical level, there continues to remain hope that price will eventually break down below the green dashed upsloping 3 sigma channel line, removing the existing divergence and signaling a reversal in the downward direction.

Currently, a divergence between the two methods of statistical analysis used to determine when Pfizer reverses its intermediate-term uptrend to a downtrend continues to exist as price continues to move upward along the lower 3 sigma channel line. A downsloping linear regression line and a series of channel lines have been added to show when the upward rally might end and the divergence eliminated to signal the completion of the reversal in the downward direction.

This divergence will be eliminated once price moves below the lower 3 sigma channel line to signal the completion of the reversal downward.



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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