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STATISTICS


JPMorgan Chase Correction Ahead

09/28/11 09:46:05 AM
by Alan R. Northam

This statistical analysis shows that over the long term, JPMorgan Chase still has farther to go on the downside, but over the shorter term it could correct for its losses.

Security:   JPM
Position:   N/A

On August 22, 2011, I published an article entitled "JPMorgan Chase Enters Bear Market." Now it is time to check in on its progress.

Figure 1 shows the daily price bars of JPMorgan Chase (JPM). This figure shows the 200-day linear regression line (solid blue line) along with its upper one sigma channel line (red dotted line), its lower one sigma channel line (green dotted line), and its lower two sigma channel line (green solid line). Besides their statistical significance, the red channel line represents overhead resistance and the green channel lines represent support.

FIGURE 1: JPM, DAILY. This chart shows the daily price chart of JPMorgan Chase (JPM) in the lower panel along with its upsloping 200-day linear regression trendline along with its associated channel lines. The top panel shows the linear regression slope indicator followed by the R-squared indicator.
Graphic provided by: MetaStock.
 
Note in this figure that price has moved down to the lower two sigma channel line. This is a significant event in that only about 5% of the time, price will move below the lower one sigma channel line. This move down to the lower two sigma channel line is an indication that price has moved too far away from its linear regression trendline (solid blue line). Once price moves significantly away from its linear regression trendline, price will move back toward the linear regression trendline. Thus, price is now in a position to move back to the linear regression trendline, but first it must cross back above the lower one sigma channel line that is now acting as resistance. Recall that once price moves below a support line, it becomes resistance.

Looking at the linear regression slope indicator in the top panel, note that it is still moving lower. In addition, note that the R-squared indicator in the middle panel is still moving upward. These are signs that price will continue to move lower over the long term. Normally, price will continue to work itself lower until the R-squared indicator moves upward to around 0.7 or higher. R-squared is currently reading 0.56.

To get a better idea, if price is ready to regress back toward the 200-day linear regression trendline, we move to a shorter time frame.

Figure 2 shows the daily price bars of JPM. This figure also shows the 50-day linear regression trendline (solid blue line), the upper one sigma channel line (red dotted line), the upper two sigma channel line (red solid line), the lower one sigma channel line (green dotted line), and the lower two sigma channel line (green solid line). Note that over the last 50 trading days, price has remained within the upper one sigma channel line and the lower one sigma channel line. This is as it should be. In fact, the stronger the trend, the closer price should hug to the linear regression trendline. Note that during September, price has actually been hugging closer to the linear regression trendline, indicating that a very strong trend is now in play. This is also noted by the R-square indicator reading of 0.81.

FIGURE 2: JPM, DAILY. This chart shows the daily price chart of JPMorgan Chase in the lower panel along with its downsloping 50-day linear regression trendline along with its associated channel lines. The top panel shows the linear regression slope indicator followed by the R-squared indicator.
Graphic provided by: MetaStock.
 
The top panel of Figure 2 shows the linear regression slope indicator. Note that this indicator continues to point downward, suggesting lower prices ahead. However, look at the R-squared indicator in the middle panel. The R-squared indicator is now measuring 0.81, indicating a very strong trend in play. The only problem with very strong trends is that they don't last very long. Thus, the R-squared indicator is suggesting that over this shorter time frame, the downward selloff is living on borrowed time.

While it is still possible for price to make yet another lower low, it is also possible for price to start moving upward toward the 200-day linear regression trendline. A breakout above the upper one sigma channel line would be a warning that price is ready to move higher and a breakout above the upper two sigma channel line would signal that price is moving back toward the 200-day linear regression trendline.

In conclusion, this statistical analysis shows that over the long term, JPMorgan Chase still has further to go on the downside, but over the shorter time frame, JPMorgan is now in a vulnerable position where it could start to rally upward toward its 200-day linear regression trendline before resuming the long-term 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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