There’s generally three types of market trends – Primary (major), Secondary and Minor.
The Primary trend (major) is of most importance to long-term investors as this trend lasts a year or more. The secondary trend is a countertrend movement compared to the primary trend. This is often caused by bullish or bearish expectations due to predicted earnings or anything else related. These can be called reactions or corrections of the price.
Secondary trend usually lasts only up to couple of months. At some point the primary trend continues and the prices go back to a more realistic price level. Within the secondary trend are minor trends that interest me, the beginning day trader the most. The minor trends are day to day price changes that last anywhere between a few hours to a few days.
The primary trend lasts a year or more and consists of intermediate movements that last anywhere between couple of weeks to couple of months. Some of the intermediate trends can be in the same direction as the primary trend and occur after a market move in the opposite ( or sideways ) direction. There are often 3 intermediate movements in the same direction as the primary trend.
A good sign of a bull market primary trend is that if each advance in the advancing market is in the higher level than the previous advance. Accordingly – each secondary trend should stop at a higher level than the previous decline level was.
Note that bear markets often last shorter period of time than bull markets.
Secondary trends (also called correction; in bear markets also recoveries) usually last between three weeks and three months. Secondary trend means a countermovement compared to the direction of primary trend. Secondary trends often last as much as 1/3 to 2/3 of the previous primary trend movement (so 1/3-2/3 of the time since the last secondary trend).
Minor trends can last anywhere between couple of hours to two weeks. For long term investors these trends aren’t too important as this is just noise. For day traders these are very important trends, possibly the most important trends. Minor trends together form an intermediate trend which often consists of three different minor movements in the direction of secondary trend. Minor trends are often started by individual actions or words of people (expected earnings etc).
According to Charles Dow the primary trend must be confirmes by both – Industrial and Transportation averages. If only one of them showed a new closing high or low then there’s no change in the primary trend expected. In order to change a primary trend both averages must show it.
After Charles Dow, during the past 50 years, in addition to the term confirmations also the term divergences has been introduced. It says that if the economy is slowing down the changes are first shown in Transportation.
As said, the primary trend reversal need to be confirmed by both averages. To confirm the trend it is not enough if there are just small changes in the averages. The averages need to be clearly above or below the previous intermediate low or high.
