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STATISTICS


TLT Downtrend To Continue

04/14/11 08:23:32 AM
by Alan R. Northam

Statistical analysis shows that the iShares Barclays 20+ Year Treasury exchange traded fund downtrend will continue.

Security:   TLT
Position:   N/A

The lower panel of Figure 1 shows the daily bar chart of the iShares Barclays 20+ Year Treasury exchange traded fund (ETF) (TLT). The lower panel also shows a green extended 20-day linear regression line and its upper and lower two sigma channels lines marking the upward rally from February. Note that this rally ended in late March when the closing price broke down below the lower upsloping green channel line. The red extended downsloping 20-day linear regression line along with its upper and lower two sigma channel lines show the current downtrend of TLT.

As long as the closing price remains within the boundaries of the upper and lower red channel lines, the downtrend will continue. Note that price has been hugging the red linear regression line since mid-March. This is an indication of a strong trend in progress with little volatility. Compare this to the price action around the green upsloping linear regression line. Note that from the end of February to mid-March, price moved away from the green linear regression line. This was an indication of a weakening upward rally and shortly thereafter the upward rally came to an end.

FIGURE 1: TLT, DAILY. This chart shows the daily price chart in the bottom panel along with two 20-day linear regression trendlines and their respective upper and lower channel lines, the linear regression slope indicator in the top panel, the R-squared indicator in the second panel, and the relative standard error index (RSEI) in the third.
Graphic provided by: MetaStock.
 
The linear regression slope indicator in the top panel tells us two things: it tells us when the linear regression line trending upward or downward and it tells us whether price is accelerating or decelerating. When the indicator moves above its zero line, it signals that the linear regression line has started to trend in an upward direction. When the linear regression slope indicator moves below the zero line, it signals when the linear regression line has started to trend downward. Note that in early April, this indicator moved below its zero line, signaling that the linear regression line had started a downtrend.

The linear regression slope also tells us when price is accelerating or decelerating. When the indicator is above zero and moving upward, it is an indication of price acceleration. When the indicator is above zero and moving downward, it is an indication that price is decelerating. When the indicator is below zero and moving lower, it is an indication the price is accelerating in a downward direction, and when the linear regression slope indicator is below zero and moving upward, it is again an indication of price deceleration.

What is important in analyzing price acceleration and price deceleration is that when price is accelerating, we can be confident that price will continue to move higher. However, once price deceleration sets in, we are warned that a change in trend is on the horizon. Note that during the upward rally from early February to mid-March, price deceleration began at the end of February. In addition, note that this indicator is now below zero and pointing lower, signaling that price is currently accelerating in a downward direction, indicating that price will continue to move lower.

The R-squared indicator also tells us two things: it tells us if there is a significant trend and it tells us the strength of the trend. A trend is considered significant if the R-squared indicator is above its critical level. By "significant," we mean how high the probability that the trend will continue. To determine this probability, we point to the critical level.

Differing critical levels determine the probability. The critical level used here determines whether there is a 95% probability of a trend continuing. Note that in early April, the R-squared indicator moved above the critical level, indicating that there was a 95% probability of the downtrend continuing.

The R-squared indicator also tells us the strength of the trend. Strength is measured from zero to one, with zero indicating that the trend has no strength and one indicating that the trend is as strong as it can be. Note that the indicator is now above 0.8, indicating a strong trend in play.

The relative standard error index (RSEI) is a measure of volatility. When the RSEI is below 0.2, it indicates low volatility. Low volatility normally occurs during a strong rally. When RSEI is above 0.8, it indicates high volatility. High volatility normally occurs near the end of a trend and is a warning that a trend reversal could be looming just over the horizon. Note that the RSEI is currently reading zero, signaling that there is no volatility. This is an indication of a strong downward rally in progress.

In conclusion, price is accelerating in a downward direction, a strong downward trend is in play, and there is no sign of volatility in the price action. These indicators all indicate a continuing downtrend.




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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