Next week the discussion will be on the best use of Relative Strength Index, Wilder's RSI.
Looking at the Price chart window above for MCD, there are 2 blue Linear Regression Lines. As with all indicators that are single line indicators, combining two primaries or a subordinate indicator applied to the primary indicator, provides a superior analysis as well as speeding up the entire indicator analysis process.
Linear Regression Lines do not average price. They are unlike Moving Averages which are a formula that adds up all of the data within a set time period and divides by the total of that day, for the simple moving average formula that creates the moving average line on the chart. The Linear Regression Lines are a straight line indicator.
Moving Averages are the oldest of all of the stock indicators, and were used and are still used primarily to confirm that the trend is still intact, and were never designed to be leading indicators by themselves. Moving Averages are subordinate indicators, whether they are used with primary indicators or with candlesticks. Remember that candlesticks are an indicator for price.
Linear Regression Lines are also a subordinate indicator but instead of smoothing price action, the Linear Regression Lines are a stark straight line from the current price back X number of days or periods of time, depending on what time frame you are using on your chart.
The example above is for a daily chart. The Linear Regression Lines are set for an analysis of the intermediate term trend and the short term trend. This provides invaluable information for proper analysis of the trend.
In the chart above, we can clearly and easily see that the intermediate term trend Linear Regression Line which is the longer of the two, is far beyond the peak of price on the chart in March when the downtrend started. What this warns is that this is heading toward a longer term trend for the downside action. The intermediate term downtrend has been underway for 7 months, which is getting close to the maximum normal length of an intermediate term correction of about 9 months average. If this were more than 12 months, then this would be a long term trend.
The short term trend Linear Regression Line has tipped up with this recent bounce run. This means that the short term trend is patterning out the intermediate term downtrend extreme angles of descent, which slows the downtrend and lessons the speculative price impact on the trend. This regular interval of the short term trend moving in a contrarian action against the intermediate term trend, is what is sustaining the intermediate term downtrend.
Without these occasional short term moves up, the intermediate term downtrend would be too steep to sustain and a V bottom would develop quickly. The short term trend is helping the downtrend continue. When the intermediate term Linear Regression Line starts to flatten and angle upward, then a bottom formation will have started. Linear Regression Lines are essential Indicators for Position and Swing Trading.
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Martha Stokes CMT
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Master Rated Technical Analyst for Decisions Unlimited, Inc.
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