|In a recent article entitled "Exxon Mobil Topping?" I showed a table of the status of the 30 Dow Jones Industrial Average (DJIA) stocks. I showed which stocks where in statistically strong bull trends based upon their most recent 50-day price points, which were topping, which were in weak bear trends, and which were in strong bear trends. In reality, the category listing those stocks topping included both bullish stocks that are in topping phases and those bullish stocks that were in weak bull markets. So perhaps I should have labeled this category "weak bullish" to be a little more correct. |
Let's take a look at the statistical analysis of JNJ. The lower panel of Figure 1 shows the day bar chart of JNJ. In this panel is also shown the 50-day linear regression trendline (middle green line) and its upper and lower two sigma channel lines. In mid-April, JNJ broke out above the upper channel line, signaling the end of the intermediate-term downtrend of JNJ. Tip: In the majority of cases, a channel break reverses the trend.
|FIGURE 1: JNJ, DAILY. This chart shows the daily price chart in the bottom panel along with the 50-day linear regression trendline and its 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 in the third.|
|Graphic provided by: MetaStock.|
|The linear regression slope indicator in the top panel shows that it has moved above its zero line. This is the formal indication that the intermediate-term trend of JNJ has reversed from a downtrend to an uptrend and price is accelerating higher.|
|The R-squared indicator measures two things. First of all, when this indicator moves above its critical level, it is a signal that the current trend has become significant in that there exists a 95% probability that the trend will continue. Second, it is a measure of strength. The higher this indicator moves, the stronger the trend. As long as this indicator is below 0.5, it is an indication that the trend is mostly made up of random price movements. However, once this indicator moves above 0.5, it indicates that the trend is made up more of price closely following the linear regression line than randomness, a sign of true strength. Note that this indicator has just moved above its critical level. This is the signal that has moved JNJ from the category of weak bullish stocks to the category of strongly trending bullish stocks. However, to become a true strong bull, the R-squared indicator still must move above 0.5.|
|The relative standard error index (RSEI) is a measure of volatility. Note that for all of 2011, RSEI has been above 0.2, indicating a volatile market. From early February to date, RSEI has been above 0.5. High volatility normally occurs just before a reversal in trend, and that is what happened in mid-April. Now, in order for the newly established uptrend to continue, RSEI needs to move back below 0.2 to indicate a low level of volatility, a sign of a healthy trend.|
|In conclusion, price is now starting to accelerate higher as the upward trend in JNJ has become statistically strong, meaning that there is now a 95% probability that the uptrend will continue. In order for this newly established uptrend to continue, the R-squared indicator needs to continue to move higher and the RSEI needs to move downward and below 0.2. If these things do not occur, then the upward rally is corrective and not a true uptrend.|
How to trade JNJ: Armed with this statistical analysis of the intermediate-term trend, the trader can now use his or her favorite traditional technical indicators to make a trade decision.
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