First Tenet

First Tenet

Uptrend: Market is said to be in upward trend when each peak in a rally reaches higher level than  the previous rally’s peak and each low in the rally must be higher than the previous rally’s low.

• Downtrend: According to Dow theory downward trend is broken up into several sell-offs, in which each sell-off also has a high and a low. Market is said to be in a downtrend when each new low in the sell-off must be lower than the previous sell-off’s low and the peak in the sell-off must be lower then the peak in the previous sell-off.

The first tenet of Dow Theory states that the market has three trends.

• Primary trend: Primary trend is the major trend of the market and is also one of the largest trend lasting for more then a year. The primary trend also impacts the secondary and minor trends within the market and thereby affects the movement in stock prices. Note, primary trend remains in effect unless there is a reversal. Below is a figure displaying an upward primary trend with some corrections along the way. 

• Secondary Trend: The secondary trend moves in a direction opposite to the primary trend, or as a correction of the primary trend. An important characteristic of a secondary trend is that its moves are often more volatile than those of the primary move. Note, 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. Below is a figure displaying secondary  trend where secondary trend is regarded as correction within a primary uptrend.

• Minor Trend: The minor trend mostly continues for less than three weeks and is related with the movements in the intermediate trend. 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 the short-term nature of the trend, the minor trend is not of major concern to Dow Theory followers as it includes a considerable amount of noise. Below figure displays upward minor trend with blue lines where the secondary trend is downward and with the given price movement the primary trend still remains upward.

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