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STATISTICS


DJIA To Continue Downtrend

10/13/11 08:09:25 AM
by Alan R. Northam

This long-term statistical analysis shows that following the current correction, the Dow Jones Industrial Average will continue its downtrend.

Security:   .DJI
Position:   N/A

The lower panel of Figure 1 shows the long term statistical analysis of the Dow Jones Industrial Average (.DJI). This figure shows the 200-day linear regression trendline (solid blue line), the upper one sigma channel line (dotted red line), the lower one sigma channel line (dotted green line), the lower two sigma channel line (solid green line), and the lower three sigma channel line (dashed green line). Besides their statistical significance, the red channel lines act as resistance and the green channel lines act as 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 upsloping 200-day linear regression trendline and its associated upper and lower channel lines. The top panel shows the linear regression slope indicator followed by the R-squared indicator. This chart shows that the DJIA remains below its linear regression trendline, a sign of bearish strength.
Graphic provided by: MetaStock.
 
Figure 1 shows that the DJIA remains below its linear regression trendline (solid blue line) since its crossing in early August. This is a sign of bearish strength. Note that the linear regression trendline is acting as resistance, while the lower two sigma channel line (solid green line) is acting as support. That price continues to move in an almost horizontal line is an indication that price is currently undergoing a correction after having sold off from its mid-July high.

Looking at the linear regression slope indicator in the top panel of Figure 1, note that in mid-September this indicator has broken down below its zero line, indicating that a new bear market trend had been established. Note also that this indicator continues to point downward. This indicates that the linear regression trendline (solid blue line in the bottom panel) is continuing to steepen in the downward direction, a bearish development. This also indicates that price continues to accelerate in the downward direction.

The R-squared indicator in the middle panel of Figure 1 shows that this indicator is above its critical level and pointing upward. As long as this indicator remains above its critical level, it indicates a 95% confidence level that the downtrend will continue. Typically, a bearish trend does not start its bottoming process until this indicator reaches 0.7 or higher. With a current reading of 0.2, this indicator is informing us that the downtrend has further to go.

In conclusion, this long-term statistical analysis shows that the DJIA remains in a strong downtrend but is currently undergoing a market correction. Once this correction has run its course, the DJIA should continue its downward selloff. Once a trend has been set in motion, it stays in motion until proven otherwise, and currently, there is no sign of a reversal.



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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