Trend | Dow Jones | S&P 500 | NASDAQ Comp | NASDAQ 100 |
Primary | Down | Down | Down | Up |
Intermediate | Up | Up | Up | Up |
Minor | Lateral | Lateral | Up | Up |
NOTE: The concepts of Primary, Intermediate and Minor trends emanate from Dow Theory. The following description of the Dow Theory is attributed to: Dow Theory: The Three-Trend Market By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com.
Dow Theory identifies three trends within the market: primary, secondary and minor. A primary trend is the largest trend lasting for more then a year, while a secondary trend is an intermediate trend that lasts three weeks to three months and is often associated with a movement against the primary trend. Finally, the minor trend often lasts less than three weeks and is associated with the movements in the intermediate trend.
Primary Trend
In Dow Theory, the primary trend is the major trend of the market, which makes it the most important one to determine. This is because the overriding trend is the one that affects the movements in stock prices. The primary trend will also impact the secondary and minor trends within the market.
Dow determined that a primary trend will generally last between one and three years but could vary in some instances.
Regardless of trend length, the primary trend remains in effect until there is a confirmed reversal. For example, if in an uptrend the price closes below the low of a previously established trough, it could be a sign that the market is headed lower, and not higher.
When reviewing trends, one of the most difficult things to determine is how long the price movement within a primary trend will last before it reverses. The most important aspect is to identify the direction of this trend and to trade with it, and not against it, until the weight of evidence suggests that the primary trend has reversed.
Secondary, or Intermediate, Trend
Dow determined that a primary trend will generally last between one and three years but could vary in some instances.
Regardless of trend length, the primary trend remains in effect until there is a confirmed reversal. For example, if in an uptrend the price closes below the low of a previously established trough, it could be a sign that the market is headed lower, and not higher.
When reviewing trends, one of the most difficult things to determine is how long the price movement within a primary trend will last before it reverses. The most important aspect is to identify the direction of this trend and to trade with it, and not against it, until the weight of evidence suggests that the primary trend has reversed.
Secondary, or Intermediate, Trend
In Dow Theory, a primary trend is the main direction in which the market is moving. Conversely, a secondary trend moves in the opposite direction of the primary trend, or as a correction to the primary trend.
For example, an upward primary trend will be composed of secondary downward trends. This is the movement from a consecutively higher high to a consecutively lower high. In a primary downward trend the secondary trend will be an upward move, or a rally. This is the movement from a consecutively lower low to a consecutively higher low.
In general, a secondary, or intermediate, trend typically lasts between three weeks and three months, while the retracement of the secondary trend generally ranges between one-third to two-thirds of the primary trend's movement. For example, if the primary upward trend moved the DJIA from 10,000 to 12,500 (2,500 points), the secondary trend would be expected to send the DJIA down at least 833 points (one-third of 2,500).
Another important characteristic of a secondary trend is that its moves are often more volatile than those of the primary move.
Minor Trend
The last of the three trend types in Dow Theory is the minor trend, which is defined as a market movement lasting less than three weeks. The minor trend is generally the corrective moves within a secondary move, or those moves that go against the direction of the secondary trend.
Due to its short-term nature and the longer-term focus of Dow Theory, the minor trend is not of major concern to Dow Theory followers. But this doesn't mean it is completely irrelevant; the minor trend is watched with the large picture in mind, as these short-term price movements are a part of both the primary and secondary trends.
Most proponents of Dow Theory focus their attention on the primary and secondary trends, as minor trends tend to include a considerable amount of noise. If too much focus is placed on minor trends, it can to lead to irrational trading, as traders get distracted by short-term volatility and lose sight of the bigger picture.
Stated simply, the greater the time period a trend comprises, the more important the trend.
For further discussion of Dow Theory we recommend "Street Smart Chart Reading Vol. 2"Pages 35-39 by Don Worden, "The Dow Theory" by Robert Rhea, "The Stock Market Barometer" by William P. Hamilton.
No comments:
Post a Comment