Monday, June 22, 2020

Dow Theory - Market Movements & Trends.

  1. Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions.
  2. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.
  3. Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.
  4. Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.

Dow Theory - Trends

Dow recognized that trends changed when the pattern of peaks and troughs reversed.

Bull Trends

A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline between rallies ends above the lowest point of the previous decline. A series of successive higher highs and higher lows.

The start of an up trend is signaled when price makes a higher low (bottom), followed by a rally above the previous high (peak):

Start = higher Low + break above previous High.

The end is signaled by a lower high (peak), followed by a decline below the previous low (bottom):

End = lower High + break below previous Low.

Bear Trends

Each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the preceding decline. A series of successive lower highs and lower lows.

A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.

Some purists argue that a trend ends if the sequence of higher highs and higher lows is broken. Others argue that a bear trend has not started until there is a lower High and Low nor has a bull trend started until there is a higher Low and High.
For practical purposes, only accept large corrections as trend changes in the primary trend.
  • A bull trend starts when price rallies above the previous high;
  • A bull trend ends when price declines below the previous low;
  • A bear trend starts at the end of a bull trend (and vice versa).

    Trend Changes

A trend should always be treated as intact until there is a clear signal that the opposite trend has started.

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