Multiple Linear regression at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Multiple Linear Regression

Multiple regression is a mathematical technique used in both technical and fundamental analysis. The technique uses a number of variables to predict some unknown variable. If for instance it was felt that the growth rate, debt to equity ratio and the yield of a stock might be useful in predicting a valid range for a price earnings ratio, then multiple linear regression would be used by a financial analyst with a range for each input, producing a range of possible Price/Earnings ratios that might be supported by the current and projected fundamentals of a stock or stocks in question. In technical analysis simple regression of price changes over a period of time can also help identify what has been acceptable in terms of valuation levels and project those acceptable levels into the future. Different time periods produce different regression results and can help identify potential price projections when the major long term trends of the market change direction.

Regression studies can also help identify potential trend reversal area's. Early identification of trend reversals is one of the most important functions of good analysis. Using regression lines and channels, an investor can look for early identification of reversals in price after penetration of a previously validated regression levels. Penetration outside of a channel is an indication that a reversal of the price trend is in a higher risk of occurring. At that point a shrewd investor is looking for evidence to support or refute the indication to avoid whipsaws and to identify potential profitable trading opportunities. As you can see in the graph below of the Amex Hong Kong 30 Index, penetration of the first regression channel occurred in September of 1998. The price trend reversed after that from a downward sloping trend in prices to an upward trend in prices that lasted over 2 years. The second regression study shows early penetration in May of 2000, with a reversal after the penetration where prices rose back inside the channel for several months before a second penetration in September of 2000 followed with declining prices, effectively a reversal of the long term trend of prices.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.