|Figure 1 shows the daily price bars of Research In Motion (RIMM). This graphic shows the 200-day linear regression line (solid blue line) along with its upper one sigma channel line (red dotted line), its upper two sigma channel line (red solid line), its upper three sigma channel line (red dashed line), and its lower one sigma channel line (green dotted line). Besides their statistical significance, the red channel line represents overhead resistance and the green channel lines support.|
|FIGURE 1: RIMM, DAILY. This chart shows the daily price chart of Research in Motion in the lower panel along with its downsloping 200-day linear regression trendline and its associated channel lines. The top panel shows the linear regression slope indicator directly followed by the R-squared indicator in the middle panel.|
|Graphic provided by: MetaStock.|
|The bottom panel of Figure 1 shows that over the last 200 trading sessions, price has bounced between the upper and lower one sigma channel lines, indicating a strong downtrend in motion. This strength is also confirmed by the R-squared indicator reading of 0.9, with a reading of 1.0 being the strongest possible. The problem with strong trends is that they don't last very long.|
|The top panel of Figure 1 shows the linear regression slope indicator. In mid-June 2011, this indicator moved below its zero line to indicate that the long-term trend for RIMM had changed from a long-term bull market to a long-term bear market. Note also that from mid-June to mid-October, this indicator continued to move in a downward direction indicating a period of price acceleration. However, from mid-October onward, this indicator has been moving in a horizontal fashion, indicating that price is no longer accelerating downward and is a warning of price deceleration ahead. Once this indicator starts to move in an upward direction, it will indicate that price deceleration has begun, which then warns of a possible long-term trend reversal to the upside.|
|The middle panel of Figure 1 is that of the R-squared indicator. This indicator measures that strength of the trend. In mid-June 2011, this indicator moved above its critical level, indicating a 95% confidence level that the newly established long-term downtrend would continue, which it has done. Since that time, the R-squared indicator has continued to rise, indicating a continued strengthening of the downtrend. As this indicator starts to approach the maximum strength reading of 1.0, note that this indicator has flattened out and is now moving sideways with a reading of 0.9. Readings of greater than 0.8 indicate very strong trends in motion. Again, the problem with strong trends is that they don't last very long.|
|This statistical analysis shows that the long-term downtrend of RIMM has become mature. It is not yet clear if a long-term reversal to the upside is in the future for this security or if RIMM will enter into a shorter-term correction to work off some of its excessive strength. Here's what to look for: Over the near term, look for a price correction upward toward overhead resistance offered by the upper one sigma channel line. A clear break above this channel line would then indicate a deeper price correction upward to the next level of resistance offered by the upper two sigma channel line. |
During this upward corrective rally, keep a lookout for a reversal back downward as signified by a lower high followed by a lower low. A breakout above the upper three sigma channel line would signal a long-term trend reversal upward. Also note that since price has not yet reversed upward, it is possible for price to make another lower low before starting an upward correction.
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