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37
Chart 11 (below) demonstrates the use of Regression Channels. These three channel lines are based on
what’s called the least squares method using closing period prices. These lines have framed the current
advance for nearly two years.
The interpretation from using this tool is that price tends to move in broad channels and tends to reverse
direction from one outer line and move toward the other outer line. Sometimes the middle line halts a
move, and even reverses it, but if penetrated in the direction of the move, price usually continues to the
outer band.
When one of the outer lines is penetrated, the implication is that, in most situations, the penetration
should not last too long nor make significance further progress in that direction. In the most recent
market action, price has hugged the upper band for several months, and made three or four challenges of
that line, so far with limited upside progress.
This chart 11, when considered alongside the other 10 charts and several technical studies, favors a
market decline beginning sometime soon and lasting possibly into the fall or early 2007.
Chart 11
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