MarketTrak Question/Comment Message

Posted By: Jim S.   Date: Mon Jul 16, 2012

Title: 5-day model slope

  Please explain what is meant by the 5-day forward slope. Thanks.

  Our 5-day model forecasts the sign (positive or negative but not the magnitude) of the 5-day forward slope of the DJIA closing values. This prediction complements our standard 1-day model forecast. The 1-day and the 5-day model results are shown in the Summary on the forecast page.

 The sign of the forward slope indicates the direction of the DJIA over the next five trading days. A rising DJIA would have positive slope and this is predicted by a positive ANO value. A declining DJIA would have negative slope and this is predicted by a negative ANO value. The actual slope is computed from a least-squares analysis of six days of closing values. Day 0 is the latest known closing value (today's close). Days 1-5 are closing values in the future. We don't know these five values yet but we will after the close on day 5. Once we are able to compute the actual slope we can compare it with what was forecasted back on day 0 to see if the sign was predicted correctly.

The slope signal is strongest when the absolute value of its ANO is 1.0. The Summary also shows the recent trend of this ANO value with an up or down arrow. The 5-day forecast along with the 1-day forecast are updated daily.

 Now let’s look at the slope example below. The DJIA values are shown as red squares and the computed least-squares straight line is blue. The least-squares line is one that is drawn so that the sum of the squared distances from each DJIA point to the line is a minimum value. Any other line drawn would have a larger sum.

 In this example, you can see that the line is rising so the slope is positive. The numerical value of the slope is +32.09. Our model is correct if we forecasted a positive ANO value after the close on day 0. You probably noticed that the DJIA is falling on days 4 and 5, even with a positive slope. We would hope that our 1-day model would correctly indicate a cash or short signal after the close of day 3. We might also find the trend of the 5-day model ANO to be falling (a down arrow following the 5-day value ANO would be shown in the Summary) on day 0.

Forecast Model Update: We now include forecast results for 5, 10 and 15 days forward. The model is identical for all three, except that the slope is computed for the number of days indicated.

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