The Dow Report: What Does it Mean that the Secondary Trend is Bullish?
By Tim W Wood CPA, September 9, 2005
In these observations I often talked about both the Primary and the Secondary trend. Most all of the work presented here is from the bigger picture perspective in relation to the Primary trend. As I have also discussed in the past, there are phases within each of these longer-term Primary trends. According to Dow theory, both Primary bull and bear markets unfold in three phases. It is the counter trend moves separating these phases that generally constitute the Secondary trend. I discussed this in the July 29th Observation, and you may want to review that article at this time as well.
Simplistically, when a market is in its third and final phase and a confirmed Dow theory signal occurs, it indicates that the Primary trend has reversed. Then we look for each of these phases to unfold in the newly established Primary trend, which again unfolds in three stages.
As an example, in 1966 the market was in the third phase of the bull market as it had advanced from its 1942 bear market low. Once the previous Secondary low point was violated by both averages, the Primary trend shifted from up to down. The first phase of the 1966 to 1974 bear market is marked in blue. The second phase is marked in yellow and the third phase in red.
Robert Rhea explained that each of the Bear market phases is divided by important rallies. Here is what he had to say: "Each of these phases seems to be divided by a secondary reaction, which is often erroneously assumed to be the beginning of a bull market. Such secondary movements seldom prove perplexing to those who understand the Dow theory." These Secondary movements are marked in green on the chart above.
This now brings us to our current chart shown below. According to Dow theory, the decline into the 2002 low was Phase I of the ongoing bear market. The rally out of the 2002 low has been the important Secondary reaction that Rhea talked about above and is marked in green on the chart below.
Since this rally began in October 2002, the Secondary trend remained positive until this past April when both averages moved below their previous Secondary low points, which occurred in January 2005. Let me say this another way. The violation of the January 2005 lows in April 2005 turned the Secondary trend down putting it back in sync with the Primary trend for the first time since October 2002. Then, from the April lows the averages rallied into the June highs and then dropped into the late June lows failing to move below the April Secondary lows. This can be seen in the close up chart below.
Then, when the averages rallied out of the late June lows and moved above the June highs, the Secondary trend became bullish at that point. In my August 1st newsletter I told my subscribers "According to Dow theory, the recent advance, which carried the averages above their June highs, has served to invalidate the Secondary sell signal that was given back in April when both averages violated their January lows. The Primary Dow theory sell signal that was generated in 1999 still stands today. Therefore, the Secondary trend is now out of sync with the Primary trend. Given the current structure of the market, it will take…"
I have been asked, in light of a recent article by Richard Russell, what it means to have the Secondary trend bullish. I hope now that you can see the difference between the Primary and the Secondary trend as defined by Dow theory. Having the Secondary trend bullish simply means that the "important Secondary reaction" (advance), out of the 2002 low separating Phase I from Phase II of this bear market has rejuvenated itself with the rally out of the June lows and is thereby still intact today according to Dow theory. I can assure you that Richard Russell is not suggesting that we are in a new bull market, because the Primary trend is indeed still bearish.
If you would like more timely detailed technical research on the Dow theory or cycles analysis the Cycles News & Views is your source. You will not find a more detailed technical research source at any price. I also cover the dollar, gold and bonds. In addition I will sometimes cover other areas such as silver and gold stocks.
Tim W. Wood
© 2005 Tim Wood