|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.|
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