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STATISTICS


DJIA Starts The New Year In Final Upward Stage

01/04/13 08:37:26 AM
by Alan R. Northam

Long-term statistical analysis shows the Dow Jones Industrial Average is starting the new year in a final long-term upward stage.

Security:   .DJI
Position:   N/A

The lower panel of Figure 1 shows the daily price bars of the Dow Jones Industrial Average (.DJI). This figure also shows the 200-day linear regression trendline (blue line) along with the upper 1 sigma channel line (red dotted line), the upper 2 sigma channel line (solid red line), the lower 1 sigma channel (green dotted line), the lower 2 sigma channel line (solid green line), and the lower 3 sigma channel line (dashed green line). The red channel lines represent resistance lines and the green channel lines represent support.

FIGURE 1: .DJI, DAILY. This chart shows the daily price chart of the Dow Jones Industrial Average in the lower panel along with its 200-day linear regression trendline and its associated 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 linear regression trendline and its associated upper and lower standard deviation channel lines are drawn on the chart from early August 2011 to mid-May 2012, covering a period of 200 trading sessions. From mid-May 2012 onward, the linear regression trendline and its associated channel lines have been extended to show the projected future path of the trend, should it continue.

Note that from August 2011 till May 2012, the closing price of the DJIA traded between the upper and lower 1 sigma channel lines, indicating a strong long-term uptrend (from statistics, the closer the data is to the linear regression trendline, the stronger the trend).

Further note that in mid-May 2012, the closing price fell below the -1 sigma channel line, trading between the -1 and -2 sigma channel lines until late October 2012. This is a sign of weakness as the closing price has now moved further away from the linear regression trendline. In late October 2012, the closing price moved below the -2 sigma channel line and has been trading between the -2 sigma channel line and the -3 sigma channel line since, indicating further weakness.

Another way to look at this weakening long-term uptrend is by looking at the linear regression slope indicator in the top panel of Figure 1. Note that this indicator peaked in mid-May 2012 and has been moving in a downward direction ever since. The downward movement of this indicator is also an indication of a weakening trend.

This indicator also provides other information about the trend as well. When this indicator moves above its zero line, it indicates a long-term uptrend and when it moves below its zero line, it indicates a long-term downtrend. Further, when this indicator is moving upward, it indicates a period of price acceleration, and when it is moving in a downward direction, it indicates a period of price deceleration. Thus, from mid-May 2012 onward, this indicator has not only been showing a weakening trend, it has also been showing a period of price deceleration (price deceleration normally occurs as the last stage in a trend before it reverses).

The next lower panel shows the R-squared indicator, measuring the confidence of the trend as well as its strength. In late February 2012, this indicator moved above its critical level to indicate a statistically significant long-term uptrend. Note that the DJIA continued to move higher until it reached its peak in September 2012. Whenever this indicator is above its critical level statistically, there is a 95% confidence level that the trend will continue as it has done.

This indicator is also a measure of the trend strength. Note the current reading of 0.11, or 11%. This indicates that only 11% of the price movement is currently contributing to the uptrend, while 89% of the price movement is random. Thus, it is no wonder that the DJIA has not made a new higher high since September. A reading of 0% means that none of the price movement is contributing to the trend and 100% means that all the price movement is contributing to the trend. A reading of 0% also means that all the price movement is random and a reading of 100% means that none of the price movement has been random.

In conclusion, this statistical analysis shows that the long-term trend of the DJIA has been weakening since May 2012, also known as a period of price deceleration. Thus, the long-term uptrend of the DJIA is in its final stage and we should expect a long-term trend downtrend reversal to occur once this period of price deceleration has run 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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