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STATISTICS


Utilities Enter Long-Term Downtrend

02/01/13 11:35:27 AM
by Alan R. Northam

Long-term statistical analysis shows the utility market sector entering a long-term trend reversal from up to down.

Security:   XLU
Position:   N/A

The exchange traded fund (ETF) Select Sector Utilities SPDR (XLU) entered into a statistically significant long-term uptrend in September 2009 over three years ago. During that time, XLU gained 27% in value. The following long-term statistical analysis shows the XLU has now entered into a long-term statistically significant downtrend.

The lower panel of Figure 1 shows the daily price bars of the Select Sector Utilities SPDR (XLU). 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 upper 3 sigma channel line (red dashed 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: XLU, DAILY. This chart shows the daily price chart of the Select Sector Utilities SPDR in the lower window along with its 200-day linear regression trendline and associate channel lines. The top window shows the linear regression slope indicator followed by the R-squared indicator in the middle window.
Graphic provided by: MetaStock.
 
In the top window of Figure 1, I have plotted the linear regression slope indicator. In this view, I have shown the linear regression slope indicator based upon a lookback period of 200 trading days. From this indicator, we can see that the linear regression slope indicator has moved below its zero line to indicate that the long-term linear regression trendline has reversed its slope from up to down, further indicating a reversal in the long-term trend from up to down.

In the middle window of Figure 1, I have plotted the R-squared indicator. This indicator also uses a 200-day lookback period to represent the long-term trend. This view shows the R-squared indicator having crossed above the critical level to indicate that the utilities sector has entered into a statistically significant uptrend. A statistically significant trend is one whereby there is statistically a 95% confidence level that the trend will continue.

In the bottom window of Figure 1, I show the daily price bars of XLU along with the lnear regression trendline and its associated channel lines. Note that on two occasions since November 2012, price dipped down below the lower -3 sigma channel line to signal that a reversal in trend was in progress. Note more recently that the linear regression slope indicator did move below its zero line to indicate a reversal in trend. Further, note that even more recently the R-squared indicator moved above its critical level to indicate that the reversal from a long-term uptrend to a long-term downtrend is complete. Thus, the two periods when price signaled that a reversal in trend was in progress fulfilled its job as an early signal of a reversal in trend. We should now expect to see price turn back down soon to resume the downtrend.

In conclusion, the Select Sector Utilities SPDR has now reversed its trend from a long-term uptrend to a long-term downtrend. As a result, we should see much lower prices for XLU in the future months ahead. The last time XLU reversed in long-term trend from an uptrend to a downtrend, in May 2008, priced moved downward for nine months and lost almost half its value.



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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