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STATISTICS


Industrials Have Reversed

11/10/11 11:42:27 AM
by Alan R. Northam

This statistical analysis shows the short-term trend in the Dow Jones Industrial Average has reversed 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), the lower three sigma linear regression channel line (dotted green line), and a downsloping 10-day linear regression trendline (thick solid blue 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, a lower three sigma channel line, and a downsloping 10-day linear regression trendline. The top panel shows the linear regression slope indicator, followed by the R-squared indicator. This chart shows that the DJIA has reversed its short-term trend from up to down.
Graphic provided by: MetaStock.
 
In the bottom panel of Figure 1, note that on November 1, price broke down below the lower three sigma linear regression channel line, signaling that a reversal in trend was underway. Following the breakdown, price started to rally and moved upward to test resistance at the lower three sigma channel line.

After a successful test, price started to move away from the channel line. This is an indication of continuing price deceleration. Then note that the last price bar reversed back downward, wiping out the gains over the last five trading sessions. In addition, note that the 10-day linear regression trendline is now sloping downward, indicating that the short-term trend is now downward (see thick solid blue line).

The linear regression slope indicator in the top panel shows that as of the last trading session, this indicator moved below its zero line, indicating that the 10-day linear regression trendline has reversed its direction from a short-term uptrend to a short-term downtrend.

The R-squared indicator in the middle panel shows that it currently remains below its critical level. This is an indication that the new short term downward trend remains weak.

A move above the critical level does two things. First, it indicates that there is statistically a 95% confidence level that the new downtrend will continue. Second, as this indicator continues to move upward above its critical level, it indicates that the new downtrend is continuing to strengthen.

However, as long as the R-squared indicator remains below its critical level, the new downtrend will remain weak and vulnerable to a reversal back upward, so this indicator bears watching.

The short-term uptrend for the Dow Jones Industrial Average (DJIA) has now reversed downward. However, this new downtrend remains weak and vulnerable to a reversal back upward. This new downtrend needs to make further progress in the downward direction to improve confidence that it will continue and become strong.

Once the R-squared indicator moves above its critical level, expect the short-term trend to continue to make lower high prices and lower low prices. However, should the R-squared indicator fail to move above its critical level, then the current short-term reversal downward is nothing more than a correction within a longer time frame uptrend. So the future movement of the R-squared indicator will tell of the future movement of price.



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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