slower declines to new lows (see Figure 4.3). 5. The confirmation date of a bear market is the date when prices on both the averages break below the low point of the last bull market correction and continue to move downward. It is not atypical for one average to lag the other in time (see Figure 4.4).

1956 Dow Jones Industrials and Rails

Rails 180

- 170

- 160

Figure 4.2 The Dow Industrial and Rails Averages-the begining of the 1956 bear market. An example from history of the typical beginnings of a bear market. The highs made on low volume indicate the "abondonment of hopes on which stocks were purchased at inflated prices."

6. Intermediate bear market rallies are usually inverted "V" patterns whe re the low is made on high

volume and the high is made on low volume (see Figure 4.5). Rhea made another observation about bear markets that deserves critical attention: At the end of the bear period the market seems to be immune to further bad news and pessimism. It also appears to have lost its ability to bounce back after severe declines and has every appearance of having reached a state of equilibrium where speculative activities are at low ebb, where offerings do little to depress prices, but where there appears to be no demand sufficient to lift quotations .... Pessimism is rampant, dividends are being passed, some important companies are usually in

tinancial ditticulty. because ot all these things, stocks make a "line." [WJhen this "line" is detinitely broken on the upside, the daily fluctuations of the ... averages show a tendency to work to slightly higher ground on each rally, with the ensuing declines failing to pass through the last

I uaiiy uow jones inousuidis anu j 1

Figure 4.3 The Dow Industrial (top) and Rails Averages (lower)-the first secondary correction of the 1956 bear market. In bear markets, secondary reactions are usually marked by sudden and rapid advances followed by decreasing activity and the formation of a "line," which ultimately leads to slower declines to new lows.

immediate low. It is then . . . that a speculative position on the long side is clearly indicated. [See Figure 4.6.]

Ihis observation applies equally to the commodities markets minus, ot course, the statement made about dividends.

Theorem number 4:

Primary Bull Markets: A primary bull market is a broad upward movement, interrupted by secondary reactions, and averaging longer than two years. During this time, stock prices advance because of a demand created by both investment and speculative buying caused by improving business conditions and increased speculative activity. There are three phases of a bull period: the first is represented by reviving confidence in the future of business; the second is the response of stock prices to the known improvement in corporations eamings; and the third is the period when speculation is rampant and inflation [of stock prices] apparent-a period when stocks are advanced on hopes and expectations. [See Figure 4.7.J

This definition also needs clarification. The distinguishing characteristic of a bull market is that price movements in all major averages continue jointly to establish new high points, react in declines to low points somewhere above the lows

1981 Dow lones Indusiial and Transportation Averages

MAR APR MAY UN

AUG SEP

Figure 4.4 The 1981 Dow )ones Industrials and Transportation Averages-the bear market confirmation. In order for a bear market to be confirmed, both averages have to pass below previous imprtant intermediate lows. In this case, the Dow breaks below the May lows on July 2. The Transports confirm the bear market on the same day. The confirmation date should not be confused with a sell signal, which occurred on July 2.