Linear regression is a statistical tool used to predict future values from past values. In the case of security prices, it is commonly used to determine when prices are overextended.
A Linear regression trend line uses the least squares method to plot a straight line through prices so as to minimize the distances between the prices and the resulting trend line. A popular method of using the linear regression trend line is to construct "linear regression channel lines" which was developed by Gilbert Raff, the channel is constructed by plotting two parallel, equidistant lines above and below a Linear Regression trend line. A Linear Regression trend line shows where equilibrium exists. Linear Regression channels show the range in which prices can be expected to deviate from a linear regression trend line. The linear regression formula is as follows:
y = a + bx
The following chart shows the Linear Regression Channel: