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in previous secondary reactions, and then proceed to new high points.

Declines in secondary reactions do not jointly fall below the previous important market lows. Some of the major characteristics of primary bull markets are:

1. The median extent of primary bull markets is a 77.5% increase in prices from the previous bear market low point.

2. The median duration of primary bull markets is two years and four months or 2.33 ears. 75% of all bull markets in history have lasted more than 657 days (1.8 years), and 67% have lasted between 1.8 and 4.1 years.

3. The beginnings of bull markets are virtually indistinguishable from the last secondary reaction in the bear market until the passage of some time. (See Rheas quote above and replace "the endings of bear markets" with "the beginnings of bull markets".) (See again Figure 4.6.)

4. Secondary reactions in bull markets are usually marked by sharp rates of price decline relativ e to the preceding and ensuing price increases. In addition, the beginning of the reaction is usually marked by high volume, with the lows made on low volume (see Figure 4.8).



1973 Dow Jones Industrial and Transportation Averages

9d7.oe Top



Figure 4.5 The 1973 Dow Jones Industrials and Transportation Averagesa typical "V" pattem for secondary corrections in bear markets. The bear market correction that began in August and topped in November shows the typical inverted "V" pattem of bear market corrections. Note how the highs (987.06 n the Dow, 186.13 on the Transports) were made on relatively low volume, whereas the subsequent sell-off occurred on accelarating volume.

5. The confirmation date of a bull market is the date when prices in both the averages break above

the high point of the last bear market correction and contmue to move upward. Theorem number 5:

Secondary Reactions: For the purpose of this discussion, a secondary reaction is considered to be an important decline in a bull market or advance in a bear market, usually lasting from three weeks to as many months, during which intervals the price movement generally retraces from 33% to 66% of the primary price change since the termination of the last preceding secondary reaction [emphasis added]. These reactions are frequently erroneously assumed to represent a change of primary trend, because obviously the first stage of a bull market must always coincide with a movement which might have proved to have been merely a secondary reaction in a bear market, the contra being true after the peak has been attained in a bull market.

A secondary reaction, or a correction, is an important intermediate-term price movement that significantly retraces the movement of the primary trend. Determining when an intermediate movement that opposes the primary trend is "important"

Transports - 230


1976 Dow Jones Industrial and Transportation Averages Figure 4.6 The Dow Industrial and Transportation Averages-the formation of a "Line" at the end of the 1976-78 bear market. When a line is clearly broken on the upside, it is often a good time to go long. Note: this breaking of a line on the upside is characteristic of both the beginnings of a secondary correction in a bear market and the beginnings of bull markets.

is the most subtle and difficult aspect of Dow Theory, and misreading such a move can be very damaging financially to the highly leveraged speculator.

Judging when an intermediate move is a correction requires looking at volume relationships, statistical data on the historical probabilities of it being a correction, the general attit ude of market participants, the financial conditions of different companies, the state of the economy, the policies of the Federal Reserve Board, and many other factors. The classification is somewhat subjective, but it is very important to be accurate. Quite often, it is difficult or impossible to tell the difference between a secondary reaction and the ending of a primary movement. There are, however, some helpful indications which will become clear in this discussion and in later chapters.

My own research bears out Rheas observation that most secondary corrections retrace from /3 to % of the previous primary swing (a primary swing is the leg of the primary movement between secondary reactions) and last from three weeks to three months. Of all the corrections in history, 61% retraced between 30 and 70%


Transports 260



1978 Dow Jones Industrial and Transportation Averages Figure 4.7 The Dow Industrial and Transportation Averages-the early stages of the 197881 bull market. The typical early stages of a bull market-in this case, the first and second primary swings interrupted by the first secondary reaction. The first primary swing illustrates what Rhea described as,"... reviving confidence in the future of business.

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