THE NORMAL DISTRIBUTION OF THE DOW JONES
KEEPING YOUR PERSPECTIVE
At times like this it helps to keep your perspective. One of the most
interesting things we have done with our charts, that you will not
find anywhere else, is to place the bell curve distribution on the
right side of the chart. If you are new to our service you might have
seen on the side of the chart the following words: top, med, bot.
These mean Top of the bell curve or a level we would consider
100% overbought. Statistically that would be a reading of three
standard deviations above trend. Conversely "bot" is the opposite side
of the bell curve, or a level we would say is 100% oversold. This is a
statistical reading of three standard deviations below trend.
"Med" suggests the median or center of the bell curve. This is the
point we would call NORMAL for the investment vehicle we were
observing. Sixty eight percent of the time anything you are evaluating
will remain within one standard deviation above or below trend.
The numbers for the Dow Jones are as follows: Top = 11,301, Med =
10,283, and Bot = 9,264.
Now let's look at the value of each standard deviation. Subtract the
top number 11,301 from the bottom number 9,264 and you get
2,037. Since there are six standard deviations making up each bell
curve we will divide 2,037 by 6 to get the value for each standard
deviation. That number is 339.5. Therefore, the total bell curve
is made up of 6 units of 339.5. Now, remember above we said that
any thing you statistically observing will remain within one standard
deviation above or below trend. Let's get those numbers for the
Dow Jones. The Med number is 10,283 or this is the statistical normal
for the Dow Jones. Each standard deviation is 339.5 so let's
add 339.5 to 10,283 and we get 10,622 for the upside parameter. Now
let's subtract 339.5 form 10,283 we get 9943. So we can
expect the Dow Jones to stay between 10,662 and 9943.5 sixty eight
percent of the time.
Delving into this further we see a couple of scenarios that could
happen. First, the Dow Jones can drop about 500 points and it would
simply go back to normal. It could drop 800 points and be within that
band it normally resides sixty eight percent of the time.
Remember, the high last week on the Dow was 11,107 and it would have
been 100% overbought at 11,300. The long and short of all
this is, the market is doing what is normal, regressing to mean. One
note to this bell curve and that is it is made up of ten week's worth
of data. As one week drops off and another week comes on, the Top, Med
& Bot can change. Therefore, another possible scenario
would be that the Dow Jones stays basically where it is and the
distribution curve changes bringing the Med up to the 10,800 level.
Either way, both scenarios suggest that getting near the top of the
ten week trading band, the Dow Jones either needs to do some
consolidating here or it needs to pullback to bring to the middle
of the distribution and a more "normal" position.
Keep track of these levels when you look at your stocks. You can get a
picture of this bell curve on the side of the chart. If by some
chance, the volatility of the stock is so high it goes off the chart
page, click Expand chart on the left side of your chart to find the
top orthe bottom. This will help you keep your perspective on the
market and your stocks.
Ten Week Distribution Curve on the Dow Jones
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9264 9604 9943 10283 10622 10962 11301
100% Oversold Normal 100% Over bought
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This is an article from Dorsey Wright and Associates, From The Analyst
available through the individual subscription.
For more articles like this see dorseywright.com
Posted with permission from DWA |
