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Industrials Reversing

11/03/11 08:37:59 AM
by Alan R. Northam

This statistical analysis shows the short-term trend in the Dow Jones Industrial Average in the process of reversing downward.

Security:   .DJI
Position:   N/A

The lower panel of Figure 1 shows the daily price bars along with the 10-day linear regression trendline (solid blue line) and the lower three sigma linear regression channel line (dotted green line). The upper panel shows the linear regression slope indicator and the middle panel the R-squared indicator.

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 10-day linear regression trendline and its lower three sigma channel lines. The top panel shows the linear regression slope indicator followed by the R-squared indicator. This chart shows the DJIA in the process of reversing its short-term trend from up to down.
Graphic provided by: MetaStock.
In the bottom panel, note that price started to move away from the linear regression trendline in mid-October, indicating price deceleration, which normally occurs just before a reversal in trend. In addition, note that price has now broken down below the lower three sigma channel line, signaling that a reversal in the short-term uptrend is now in progress.

The linear regression slope indicator in the top panel shows that it recently made a lower peak, confirming price deceleration -- a process that often occurs just before a trend reversal. Note that a formal reversal in trend from up to down will occur when this indicator moves below its zero line.

The R-squared indicator in the middle panel shows that it has now crossed below its critical level, indicating that there no longer exists a significant uptrend. This is an indication that the short-term uptrend is now vulnerable to a reversal.

While that short-term uptrend in the Dow Jones Industrial Average (DJIA) is still going upward, there are statistical signs that show that this short-term trend is in the process of reversing. Confirmation will come when the linear regression slope indicator crosses below its zero line and the R-squared indicator crosses back above its critical level. Once the reversal process is complete, the short-term price swings will start making lower highs and lower lows.

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 or by visiting his website at You can also follow him on Twitter @TradersClassrm.

Garland, Tx
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