There are countertrend movements in the direction of the major trend, and these trends Dow called secondary price movements. As we have seen, bullish or bearish expectations for the market get overly onesided and ahead of the fundamentals related to earnings prospects. Eventually a reaction develops that causes prices to correct back to a more realistic price level. Reactions or corrections are price swings that are in the opposite direction of the main or major trend. Once these run their course, the primary trend resumes. The segments that make up the price swings both in and against the direction of the primary trend can also be referred to as intermediate price swings or moves and last a few weeks to a few months only. Within these intermediate price moves are day-to-day price fluctuations that Dow called minor trends.
These can be a few hours to a day or a few days—they’re most often contained within a one-to-two-week period. Both intermediate and minor trends are of importance to traders primarily—minor trends are all that concern a day trader who will likely complete every trade within the same day. Intermediate trends are of some importance to investors when they are looking for the best point to enter the primary trend or to add to their position(s) in a stock or the market.
The Primary Trend
The primary or major trend is a price movement that usually lasts for a year or more. The exceptions to this time duration do exist and I pointed out the very short duration of the 1987 decline. It’s considered to be a major trend because of the percentage decline involved and by the prior intermediate lows it exceeded, as can be seen in Figure 3.1. One widely accepted measure of what constitutes a bear market is when there is a de cline that takes prices more than 20 percent below the high point reached in the prior advance. Dow didn’t have a rule or guideline on this subject.
The primary trend is composed of smaller movements of an intermediate duration of a few weeks to a few months. Some of these intermediate trends run in the same direction as the primary trend and occur after a market move that runs in either the opposite direction or sideways. These are also called secondary trends and will be discussed in the following section. There are often, not always, three intermediate movements or waves in the same direction as the primary trend, as will be discussed in a later chapter that has a description of Elliott wave theory.
An essential guideline as to a trend being a primary bull market is that each advance within the advancing trend should reach a higher level than the rally that preceded it. And each secondary reaction or countertrend move should stop at a level that is above the prior decline. The reverse movement occurs in a primary bear market trend as prices fall to lower and lower secondary laws. An analogy to the primary trend is that it is like the tide of the ocean. In the rising tide, each wave comes in to a higher and higher point. And just as the rising tide lifts all the boats, a bull market takes all stocks higher. The waves in an outgoing tide gradually recede from a high point and everything falls with it.
A primary up trend is considered to be a bull market and a primary down trend, a bear market. If you are an investor in terms of your time horizon and investment goals, you should attempt to buy stocks as soon as possible after a bull market has begun. An example is shown in Figure 3.2, taken from the 1990–1991 period, showing both a primary down trend or bear market and the primary up trend or bull market that developed following it. You have noticed from this and the other earlier bear market example from 1987, that the duration of primary bear market trends can be relatively short, compared to the duration of primary uptrends. On average this has been true since the 1950s due to the longer periods of economic expansion and shorter periods of recession, as there is more urgency to end a recession. It also relates to the fact that investors tend to stagger their purchases over the duration of bull markets, providing ongoing buying power, whereas selling out is often a one time decision and would be buyers stay away and don’t support the market on the declines, especially in a panic phase.
Secondary Trends
Secondary trends are of a shorter duration—typically, three weeks to three months—and interrupt the major direction of stock prices with a countertrend movement. Such moves are also called corrections in a bull market as they correct the situation where prices have risen too far, too fast. Secondary rallies are also called recovery rallies in a bear market. Frequently, these secondary countertrends retrace anywhere from a little more than a third to as much as two-thirds of the prior advance or decline. Very common is to see retracements of 50 percent of the prior price swing in the direction of the primary trend. It is not always easy to decide when and if a secondary trend is underway, but there are technical analysis measurements that will help us tell, which we will be examining in later chapters.
To continue the ocean analogy, the secondary trend is like the waves of the ocean. They can be big and they can knock you over, but they will come in and go out within the bigger movement of the tide—the primary trend.
Minor Trends
The minor trends are the price fluctuations that occur from day to day and week to week, although a minor trend will rarely last more than two to three weeks. In terms of the overall market trend these are just noise and relatively unimportant. They can be compared to mere ripples on a wave.
Together, however, the minor trends make up the intermediate trends. According to the wave theory devised by R.N. Elliott, who was influenced by Rhea’s Dow theory work of the 1930s, there are usually three distinct minor movements in the same direction as the secondary trend. Elliott wave theory also recognizes the importance of the three phases of a bull or bear market, as we discuss later also. Last, we could say that the minor trend could be one that is set off by the actions or words of an individual—for example, the chairman of the U.S. Federal Reserve Bank when that individual makes a statement hinting at the direction of Fed policy regarding interest rates. Or the precipitating action might be a statement from a key company in a key industry about their actual or expected earnings or profit trends.
Read More : Three Types Of Trends
