Linear regression
Linear regression uncovers the pure trend and weeds out price volatility. It is a line drawn straight out from the bottom or at the beggining of a trend and extends infinitely at a future date. This line is used to project a steady rise or drop in the price of a security. Linear regression is a way to rationally assume the likely movement of the price of a stock or currency from point X to a specified future point Y. For instance, technical traders are not euphoric when they see a very steep rise on the price of a security. If a price is accelerating at a speed outside the projected regression line, it is very likely that a bubble occured. In comparison to aerodynamics, if an airplane ascends too steep, its momentum decreases until speed is not enough to produce anymore lift and thus, it stalls and falls back down. Before the market peak of the Dow at 14,093 in October of 2007, most analyst say that the dow would reach 16,000 or even 20,000. For most technical traders, prices are overstretched and is due for a major retracement.
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