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Analytical Toolbox: The Long-Term Trend

By Clare White, CMT, Optionetics.com | Thu April 5, 2012 12:31PM PT


The Dow Jones Industrial AverageSM (INDU) has peaked on an intermediate term basis for the last two years, making one ask, “how are things looking now?”

Figure 1 provides a weekly line chart for INDU on an arithmetic scale. Although log scales provide better relative information regarding rice changes, the arithmetic scale is needed to display the linear regression channel. The ProfitSource [PS] chart includes:

  • Weekly index data from 2005 – present
  • A linear regression channel using 7/3/2009 & 7/2/2010 as respective start and end dates with the channel lines extended to both the left and right.
  • Volume Bars
  • A 20-week simple moving average [SMA] for volume


While a two year tendency is far from something that can be described as a statistical expectation going forward, it still makes one want to look at where we are in this bullish cyclical move. The linear regression channel is constructed using 2009 & 2010 lows once the bullish trend was established. So rather than the March 2009 low, the July 2009 low is the start date so a more sustainable trend is included in the regression.


fig 1 indu wkly1

Figure 1 INDU Weekly Line Chart with Regression Channel, Volume & Volume SMA


It should be noted that at this point:

  • Current INDU levels exceed the two previous peaks from 2010 and 2011; however, its rate of ascent appears to be waning. This can be seen with peaks at the upper regression channel line in 2010 and 2011 and a March 2012 high that has yet to reach the middle regression channel.
  • A second indication the bullish cyclical move is weakening is the break of the regression channel that occurred with the 2011 late summer/early fall lows for INDU.
  • Decreasing volume displayed as a declining 20-week SMA is issuing a warning


It’s certainly possible for volume to pick up giving INDU the power needed to push through resistance at the middle channel line and continue a move towards the upper boundary line. However, it seems a more moderate intermediate-term retracement to the lower regression channel line offers a better probability for such a prospect. This would allow INDU to gain the strength and volume needed to surpass the middle regression channel line.

It is also possible that the lower boundary line once again fails with any intermediate-term move downward.


fig 2 indu weekly 2

Figure 2 VIX INDU Weekly Line Chart using Log Scale (1952–2012)


A bigger picture view using a log scale is displayed in Figure 2. The move from 2009 lows has certainly been an impressive one, but investors must still acknowledge the sideways price action visible since the late 1990’s.

For a more compressed view, Figure 3 provides a daily line chart for INDU with the same linear regression channel. The short-term volume trend appears to be holding steady a little better, as seen by a sideways trending 20-day SMA.


fig 3 indu dly

Figure 3 INDU Daily Line Chart with Regression Channel, Volume & Volume SMA


Although many indicators can be added to these charts to gain insight, it’s sometimes good to just step back and look at more simple views of the trend.



Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site

Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.


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