Secondary Trend The Minor Trend

1. The Secondary Trend

…a secondary reaction is considered to be an important decline in a bull market or advance in a bear market, usually lasting from three weeks to as many months, during which intervals the price movement generally retraces from 33 percent to 66percent of the primary price change since the termination of the last preceding secondary reaction. (Rhea, 1932)

The secondary trend is an intermediate-term trend that runs counter to the primary trend. For example, during a several-year primary uptrend, prices may fall for a few weeks or a few months. During this secondary trend market decline, prices fall often, erasing 33% to 66% of the gain that has occurred since the completion of the previous secondary uptrend. Points A to B in Figure 6.2 represent a secondary downtrend.

Being able to anticipate or recognize secondary reactions increases profit capabilities by taking advantage of smaller market swings, but Dow believed this exercise was too dangerous. Because the primary trend and secondary trend reversal have similar characteristics, secondary reactions are often initially assumed as changes in primary trends or are mistakenly thought to be only reactions when the primary trend is changing.

2. The Minor Trend

Inferences drawn from one day’s movement of the averages are almost certain to be misleading and are of but little value except when “lines” are being formed. The day to day movement must be recorded and studied, however, because a series of charted daily movements always eventually develops into a pattern easily recognized as having a forecasting value. (Rhea, 1932)

A line is two to three weeks of horizontal price movement in an average within a 5% range. It is usually a sign of accumulation or distribution, and a breakout above or below the range high or low respectively suggests a movement to continue in the same direction as the breakout. Movement from one average unconfirmed by the other average is generally not sustained. (Rhea, 1932)

The portion of the Dow Theory which pertains to “lines” has proved to be so dependable as almost to deserve the designation of axiom instead of theorem. (September 23, 1929, in Rhea, 1932; pg. 249)

The stock market is not logical in its movements from day to day. (1929, in Rhea, 1932; 249)

Dow, Hamilton, and Rhea would likely be horrified at today’s preoccupation with minute-to-minute “day trading” and would likely consider such activity too risky. (Based on the percentage of day traders who currently fail, they would be right.) Their observation essentially states that prices become more random and unpredictable as the time horizon shrinks. This is certainly true today as well and is one reason why, as during Dow’s, Hamilton’s, and Rhea’s time, investors today should concentrate on longer-term time horizons and avoid the tempting traps in short-term trading.

Source: Kirkpatrick II Charles D., Dahlquist Julie R. (2015), Technical Analysis: The Complete Resource for Financial Market Technicians, FT Press; 3rd edition.

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